The role of uncertainty and sentiment for intraday volatility connectedness between oil and financial markets

Abstract

We quantify intraday volatility connectedness between oil and key financial assets and assess how it is related to uncertainty and sentiment measures. For that purpose, we integrate the well-known spillover methodology with a TVP VAR model estimated on a unique, vast dataset of roughly 300 thousand 5 minute quotations for crude oil, the US dollar, S&P 500 index, gold and US treasury prices. This distinguishes our investigation from previous studies, which usually employ relatively short samples of daily or weekly data and focus on connectedness between two asset classes. We contribute to the literature across three margins. First, we document that market connectedness at intraday frequency presents new picture on markets co-movement compared to the estimates obtained using daily data. Second, we show that at 5 minute frequency volatility is mostly transmitted from the stock market and absorbed by the bond and dollar markets, with oil and gold markets being occasionally important for volatility transmission. Third, we present evidence that daily averages of intraday connectedness measures respond to changes in sentiment and market-specific uncertainty. Interestingly, our results contrast with earlier findings, as they show that connectedness among markets decreases in periods of high volatility owing to market-specific factors. Our study points to the importance of using high-frequency data in order to better understand market dynamics.