The Dynamic Influence of Uncertainty on Sector Equity Funds: A Time-Frequency Analysis of Oil, Gold, and Market Volatility

This research employs a time-frequency approach to explore the interrelations among US sector equity ETFs, oil, gold, the overall stock market, and various uncertainty indicators across different time horizons from 2019 to 2023. It utilizes a frequency-dependent spillover index and strategies for portfolio hedging to construct its findings. The analysis reveals that the market's anticipation of volatility in the US stock market for the next 30 days, as measured by the VIX, significantly influences US sector equity ETFs over both short and long durations. This influence is succeeded by expectations of oil price volatility, denoted by OVX. Among the indicators of uncertainty, the impact of US economic policy uncertainty on sector ETFs is found to be minimal. Comparatively, oil exhibits a more pronounced impact on sector ETFs than gold, across both observed time frames. The interactions among sector ETFs, gold, oil, and the uncertainty measures display a non-uniform nature, being more pronounced in the short term and intensifying during periods of financial distress and economic instability. From a portfolio hedging perspective, oil emerges as a superior hedge against sector ETF volatility in both the immediate and extended terms, with the Consumer Staples ETF showing the greatest hedging efficiency.