Asymmetric Effects of Policy Uncertainty on Market Volatility Under Sudden Shock

This study employs the Structural Break Threshold Vector Autoregression (SBTVAR) models to examine the asymmetric effects of policy shocks on the price volatility of various asset classes. The results indicate that pandemic-induced economic policy uncertainty and national lockdowns triggered a structural break in the relationship between policy uncertainty and the volatility of stocks, commodities, oil, gold, and cryptocurrencies. Variance impulse response functions using GARCH structural errors reveal a regime shift in volatility linkages with varying responses across assets. Bitcoin was the most reactive to the policy shock, followed by oil, commodities, stock, and gold. Oil and commodities exhibited the largest differences in their responses before and after the structural break. The SBTVAR with a constant threshold and break outperforms the conventional VAR, Threshold VAR and Structural Break VAR by capturing the asymmetric dynamics of economic and financial risk factors