The dependence between various uncertainties (EPU, VIX, and GPR) and the return connectedness of financial assets: a quantile coherency analysis

This paper examines the dependence between economic policy uncertainty (EPU), market-implied volatility (VIX), and geopolitical risk (GPR) and the dynamic connectedness of financial assets using a novel quantile coherency approach. Different from the existed literature mainly concern single-frequency or single-market state, this paper provides fresh findings: First, the interplay between uncertainty and the return connectedness of financial assets is heterogeneous, varying across different market states and investment horizons. Second, in bear markets, the VIX shows a positive association with total return connectedness across all investment horizons, while the EPU shows a negative one; the GPR is negatively associated only in the long term. Third, EPU and GPR mainly interact with commodity assets (WTI and gold) during bear markets, while the VIX primarily link to investment assets (S&P 500, bonds, and exchange rates). In sum, these results offer crucial implications for policymakers to monitor financial market volatility, as well as for investors in optimizing asset allocation.