TSFS

Spillover and dependence structure between
uncertainties, equity, energy and food markets:

evidence from crises and geopolitical events
Authors:
Mohamed Yousfi Houssam Bouzgarrou
Higher Institute of Commercial Associate Professor, Higher Institute of
Studies of Sousse, Tunisia Finance and Taxation of Sousse
Email: yousfimohamed128@gmail.com (ISFFS), University
of Sousse, Tunisia
Em:ail h.bouzgarrou@hotmail.fr
Table of contents
 Introduction
 Literature Review
 Data and Methodologies
 Empirical Findings
 Conclusion
2
Keywords: COVID-19, Russian-Ukrainian war, EPU, GPR, Financial assets M.YOUSFI
Table of contents
 Introduction
 Conclusion
3
Introduction
 Due to financial globalization:
- The global financial market behaviors change over time.

- Became sensitive to major unexpected economic-financial
and political events.
 Over the past two decades, we have experienced several

economic and political events where lead to sharply
increased uncertainty markets.
4
Keywords:
Hedging
COVID-19,
stock price
Russian-Ukrainian war, EPU, GPR, Financial assets
YOUSFI _ 2018-2019 M.YOUSFI
Introduction
 The global stock markets suffered unprecedented shocks,
and the increase of uncertainty caused the market indices to
fluctuate greatly during the economic-financial crisis and
the unexpected events.
 The economic instability and high financial stress represents

the main source of :
- Systematic risk,
- Market volatility,
- Support the market inter-linkages.
5
Keywords:
Hedging
COVID-19,
stock price
Introduction
 Around one decade later from the global financial crisis, the
worldwide has witnessed a new wave of crisis in 2020,
causing by the spread of COVID-19 virus.
 The pandemic affects:
- The primary sectors which include industries involved in

The extraction of raw materials,
- The secondary sectors involved in the production of

finished products,
- The tertiary sectors including all service provision

industries.
6
Keywords:
Hedging
COVID-19,
stock price
Introduction
 Two years after the spread of the coronavirus and while the
global economies and financial markets still suffered from
the repercussion of the pandemic, the world has experienced
a new political tension:
“The Russian invasion of Ukrainian in February 24, 2022”.
 This geopolitical event has exacerbated unrest and caused

the negative effects on:
- The global economies and financial markets

- Has brought severe shocks to the energy and soft
commodities markets, like food prices, especially.
7
Keywords:
Hedging
COVID-19,
stock price
Introduction: objective of the study
 We examine the dynamic relationships between the Europe
economic policy uncertainty as well as the geopolitical risk,
equity index, oil indices, natural gas and food index.
 To go further this study, we examine also the tail dependence

structure between the uncertainty measures and the sample
of financial assets under study.
8
Keywords:
Hedging
COVID-19,
stock price
Table of contents
 Introduction
 Conclusion
9
Literature Review
 The literature shows a surge of interest from the academic community
and scholars on the effects political uncertainty on financial markets.
Such as He et al. (2019) ; Balcilar et al. (2017) ; Bouri et al. (2019);
Gkillas et al. (2018) ; Li et al. (2019) ; Sharif et al. (2020); Kannadhasan
and Das (2020), among others).
- Bernanke (1983) documents that the economic policy uncertainty has been
a crucial determinant of the economic cycle, investment decision and
policymaking.
- Pastor and Veronesi (2012; 2013) suggest that the uncertainty in

government policies will tend to decrease the equity returns.
10
Keywords:
Hedging
COVID-19,
stock price
Literature Review
- Kim et Iwasawa, (2017) and Joo et al, (2020) indicate that the increase of
uncertainty caused the market prices to fluctuate greatly during the global
financial crisis.
- Gu et al., (2021) indicate that the economic policy uncertainty and

geopolitical risk indexes are uncertainty measures and highly correlated with
the stock markets.
- Li et al. (2020) suggest that EPU can lead to high stock market volatility,
which is helpful for predicting volatility, and can negatively affect the stock
returns.
- Das et al. (2019) indicate that the impact of EPU and GPR is
heterogeneous across the markets in terms of causality and intensity.
11
Keywords:
Hedging
COVID-19,
stock price
Table of contents
 Introduction
 Conclusion
12
Data & Methodologies
Data sample:
 Uncertainty indices:
-Europe policy uncertainty and geopolitical risk.
 Various financial assets:
-Euro Stoxx 50.
-Oil (WTI and Brent prices).
-Natural gas.
-Food indices.
 The monthly sample period span from January 2005 to

July, 2022.
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Keywords:
Hedging
COVID-19,
stock price
14
Keywords:
Hedging
COVID-19,
stock price
We employ:
 The dynamic connectedness index of Diebold and Yilmaz (2012; 2014;
2015), enhanced by Antonakakis and Gabauer (2017), Antonakakis et al.
(2020).
They improve the connectedness index of Diebold and Yilmaz by

introducing the TVP-VAR approach, which predicates upon a time-varying
variance-covariance structure.
 The quantile-on-quantile methodology developed by Sim and Zhou

(2015).
15
Keywords:
Hedging
COVID-19,
stock price
Table of contents
 Introduction
 Conclusion
16
Empirical Findings: Spillover approach
Dynamic connectedness table of spillover between EPU, GPR, Euro Stoxx 50, oil,
natural gas and Food indices.
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Keywords:
Hedging
COVID-19,
stock price
Considering that the connectedness between the financial assets and
uncertainties is time-varying, it is more important to investigate how this
volatility spillover index evolves over time.
Total volatility spillover index
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Keywords:
Hedging
COVID-19,
stock price
 The analysis of the spillover index shows that the linkage between
uncertainty indices and financial assets is deeply influenced by the risk
of an extreme tail event.
 The dynamic connectedness across the distributional level, thus merit

careful analysis.
 Therefore, we will examine the tail dependence between each financial

asset and uncertainties using the quantile-on-quantile approach.
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Keywords:
Hedging
COVID-19,
stock price
Empirical Findings: Q-Q approach
Dependence structure between financial assets and uncertainties applying the QQ approach.
The estimates of the slope coefficient, β1 (, ) placed on the z-axis, which captures the effect
of the th quantile of EPU and GPR placed on the x-axis on the th quantile of the each
financial asset on the y-axis. .
20
Keywords:
Hedging
COVID-19,
stock price
21
Keywords:
Hedging
COVID-19,
stock price
22
Keywords:
Hedging
COVID-19,
stock price
Geopolitical Risk and the financial assets.
The Q-Q findings reveal that there is a negative and strong nexus appearing:
when geopolitical risk:
- when geopolitical risk is bearish, whatever the mode of the financial
market (bearish, normal, bullish).
- when geopolitical risk is higher (bullish) and various financial markets are
normal (medium quantiles).
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Keywords:
Hedging
COVID-19,
stock price
Economic policy uncertainty and the financial assets.
The Q-Q findings show that the negative dependence appears:
- At lower quantiles of EPU and across different circumstance of Europe

equity, and also when both are bullish.
- At high quantiles of oil indices and bearish economic uncertainty.
- When both Natural gas and food index indices are bullish and whatever
regime of economic uncertainty.
Otherwise, although the evidences indicate the existence of the negative relationships
with different degrees that cover most quantiles connectedness among both uncertainty
indices and the different financial asset classes, we also detect some positive
dependence across various regimes, especially, the natural gas and both uncertainties.
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Keywords:
Hedging
COVID-19,
stock price
Table of contents
 Introduction
 Conclusion
25
Conclusion
 The findings of the study highlight the strong volatility spillover between
uncertainties and the equity, energy and food indices, the effect is more
pronounced during stress market periods like global financial crisis, the
COVID-19 pandemic and the Russian-Ukrainian conflict.
 During the critical period, such as the crisis periods, the risk contagion
increases between economic and financial assets, due to a high systemic
risk. The increase in the uncertainty levels tends to increase the volatility
of financial markets.
26
Keywords:
Hedging
COVID-19,
stock price
Conclusion
The repercussion of the uncertainties on different financial markets caused

by:
- Global financial crisis,
- The COVID-19 pandemic,
- The geopolitical event “Russia invasion of Ukraine”
Represent the main source of market risks, which certainly influences the
financial contagions, it can lead to some connectedness in capital flows
and asset prices.
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Keywords:
Hedging
COVID-19,
stock price
Conclusion
 The results of dependence structure show that the impact the GPR as
well as EPU index on financial assets varies across quantiles and is not
symmetric.
 This suggests that the nexus between the uncertainty indices and
financial returns is not just nonlinear, but also sensitive to the uncertainty
levels, and affected by the bullish, normal and bearish circumstance of
the financial markets.
 Overall, the heterogeneity in the tail dependence structure between GPR,

EPU and the asset returns shows the complexity of their linkage.
28
Keywords:
Hedging
COVID-19,
stock price
THANK YOU FOR YOUR
ATTENTION
29

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Spillover and dependence structure between

uncertainties, equity, energy and food markets:

- The global financial market behaviors change over time.

 Over the past two decades, we have experienced several

 The economic instability and high financial stress represents

 The pandemic affects:

- The primary sectors which include industries involved in

- The secondary sectors involved in the production of

- The tertiary sectors including all service provision

 This geopolitical event has exacerbated unrest and caused

- The global economies and financial markets

 To go further this study, we examine also the tail dependence

- Pastor and Veronesi (2012; 2013) suggest that the uncertainty in

- Gu et al., (2021) indicate that the economic policy uncertainty and

 The monthly sample period span from January 2005 to

They improve the connectedness index of Diebold and Yilmaz by

 The quantile-on-quantile methodology developed by Sim and Zhou

 The dynamic connectedness across the distributional level, thus merit

 Therefore, we will examine the tail dependence between each financial

The Q-Q findings show that the negative dependence appears:

- At lower quantiles of EPU and across different circumstance of Europe

The repercussion of the uncertainties on different financial markets caused

 Overall, the heterogeneity in the tail dependence structure between GPR,

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