Research article Topical Sections

Interdependence of oil prices and exchange rates: Evidence from copula-based GARCH model

  • Received: 22 April 2019 Accepted: 30 July 2019 Published: 13 August 2019
  • This paper aims to investigate the conditional dependence structure between crude oil prices and three US dollar exchange rates (China, India and South Korea) from a new perspective using a copula-GARCH approach. Various kinds of copulas both time-invariant and time-varying dependence dynamics are fitted. Over the 2008–2018 period, the findings provide evidence of significant dependence in terms of symmetric structure between the oil prices and the exchange rate returns. Further, the tail dependence and dynamic dependence between two variables add a supplement to the explanatory ability of the model. Empirical results indicate the intercorrelation between crude oil and exchange rate movements, and provide benefits in risk diversification and inflation targeting. The findings also have significant implications for risk management, monetary policies to determine the behavior of fiscal policy in oil-exporting countries.

    Citation: Ngo Thai Hung. Interdependence of oil prices and exchange rates: Evidence from copula-based GARCH model[J]. AIMS Energy, 2019, 7(4): 465-482. doi: 10.3934/energy.2019.4.465

    Related Papers:

  • This paper aims to investigate the conditional dependence structure between crude oil prices and three US dollar exchange rates (China, India and South Korea) from a new perspective using a copula-GARCH approach. Various kinds of copulas both time-invariant and time-varying dependence dynamics are fitted. Over the 2008–2018 period, the findings provide evidence of significant dependence in terms of symmetric structure between the oil prices and the exchange rate returns. Further, the tail dependence and dynamic dependence between two variables add a supplement to the explanatory ability of the model. Empirical results indicate the intercorrelation between crude oil and exchange rate movements, and provide benefits in risk diversification and inflation targeting. The findings also have significant implications for risk management, monetary policies to determine the behavior of fiscal policy in oil-exporting countries.


    加载中


    [1] Reboredo JC (2012) Modelling oil price and exchange rate co-movements. J Policy Model 34: 419–440. doi: 10.1016/j.jpolmod.2011.10.005
    [2] Aloui R, Aïssa MSB, Nguyen DK (2013) Conditional dependence structure between oil prices and exchange rates: A copula-GARCH approach. J Int Money and Finance 32: 719–738. doi: 10.1016/j.jimonfin.2012.06.006
    [3] Hamilton JD (1983) Oil and the macroeconomy since World War II. J political Econ, 91: 228–248. doi: 10.1086/261140
    [4] Cunado J, De Gracia FP (2005) Oil prices, economic activity and inflation: evidence for some Asian countries. Q Rev Econ Finance, 45: 65–83. doi: 10.1016/j.qref.2004.02.003
    [5] Zhang D (2008) Oil shock and economic growth in Japan: A nonlinear approach. Energy Econ, 30: 2374-2390. doi: 10.1016/j.eneco.2008.01.006
    [6] Beckmann J, Czudaj R (2013) Oil prices and effective dollar exchange rates. Int Rev Econ Finance, 27: 621–636. doi: 10.1016/j.iref.2012.12.002
    [7] Wu CC, Chung H, Chang YH (2012) The economic value of co-movement between oil price and exchange rate using copula-based GARCH models. Energy Econ 34: 270–282. doi: 10.1016/j.eneco.2011.07.007
    [8] Krugman P (1983) Oil and the dollar in Economic interdependence and flexible exchange rates. MIT Press. Cambridge.
    [9] Golub S (1983) Oil prices and exchange rates. Econ J 93: 576–593. doi: 10.2307/2232396
    [10] Bloomberg SB, Harris ES (1995) The commodity-consumer price connection: Fact or fable? Econ Policy Rev 1: 21–38.
    [11] Brewster D (2010) India's developing relationship with South Korea: A useful friend in East Asia. Asian Surv 50: 402–425. doi: 10.1525/as.2010.50.2.402
    [12] Hammoudeh S, Li H (2008) Sudden changes in volatility in emerging markets: the case of Gulf Arab stock markets. Int Rev Financ Anal 17: 47–63. doi: 10.1016/j.irfa.2005.01.002
    [13] Brayek AB, Sebai S, Naoui K (2015) A study of the interactive relationship between oil price and exchange rate: A copula approach and a DCC-MGARCH model. J Econ Asymmetries 12: 173–189. doi: 10.1016/j.jeca.2015.09.002
    [14] Bai X, Lam JSL (2019) A copula-GARCH approach for analyzing dynamic conditional dependency structure between liquefied petroleum gas freight rate, product price arbitrage and crude oil price. Energy Econ, 78: 412–427. doi: 10.1016/j.eneco.2018.10.032
    [15] Nusair SA, Kisswani KM (2015) Asian real exchange rates and oil prices: A cointegration analysis under structural breaks. Bull Econ Res 67: S1–S25. doi: 10.1111/boer.12027
    [16] Hussain M, Zebende GF, Bashir U, et al. (2017) Oil price and exchange rate co-movements in Asian countries: Detrended cross-correlation approach. Phys A: Stat Mech Appl 465: 338–346. doi: 10.1016/j.physa.2016.08.056
    [17] Chen H, Liu L, Wang Y, et al. (2016) Oil price shocks and US dollar exchange rates. Energy 112: 1036–1048. doi: 10.1016/j.energy.2016.07.012
    [18] Genest C (1987) Frank's family of bivariate distributions. Biometrika 74: 549–555. doi: 10.1093/biomet/74.3.549
    [19] Turhan I, Hacihasanoglu E, Soytas U (2013) Oil prices and emerging market exchange rates. Emerging Mark Finance Trade 49: 21–36. doi: 10.2753/REE1540-496X4901S102
    [20] Basher SA, Haug A, Sadorsky P (2012) Oil prices, exchange rates and emerging stock markets. Energy Econ 34: 227–240. doi: 10.1016/j.eneco.2011.10.005
    [21] Lizardo RA, Mollick AV (2010) Oil price fluctuations and US dollar exchange rates. Energy Econ 32: 399–408. doi: 10.1016/j.eneco.2009.10.005
    [22] Bénassy-Quéré A, Mignon V, Penot A (2007) China and the relationship between the oil price and the dollar. Energy policy 35: 5795–5805. doi: 10.1016/j.enpol.2007.05.035
    [23] Chen SS, Chen HC (2007) Oil prices and real exchange rates. Energy Econ 29: 390–404. doi: 10.1016/j.eneco.2006.08.003
    [24] Nelson RB (2006) An introduction to Copulas. Springer: Verlag, New York.
    [25] Sklar M (1959) Functions de repartition an dimensions et leurs marges. Publ inst statist univ Paris 8: 229–231.
    [26] Tang J, Sriboonchitta S, Ramos V, et al. (2016) Modelling dependence between tourism demand and exchange rate using the copula-based GARCH model. Curr Issues Tourism 19: 876–894. doi: 10.1080/13683500.2014.932336
    [27] Clayton DG (1978) A model for association in bivariate life tables and its application in epidemiological studies of familial tendency in chronic disease incidence. Biometrika 65: 141–151. doi: 10.1093/biomet/65.1.141
    [28] Gumbel EJ (1960) Bivariate exponential distributions. J Am Stat Assoc 55: 698–707. doi: 10.1080/01621459.1960.10483368
    [29] Genest C (1987) Frank's family of bivariate distributions. Biometrika 74: 549–555. doi: 10.1093/biomet/74.3.549
    [30] Joe H (1993) Parametric families of multivariate distributions with given margins. J Multivar Anal 46: 262–282. doi: 10.1006/jmva.1993.1061
    [31] Joe H, Hu T (1996) Multivariate distributions from mixtures of max-infinitely divisible distributions. J Multivar Anal 57: 240–265. doi: 10.1006/jmva.1996.0032
    [32] Cech C (2006) Copula-based top-down approaches in financial risk aggregation.
    [33] Shih JH, Louis TA (1995) Inferences on the association parameter in copula models for bivariate survival data. Biometrics 51: 1384–1399. doi: 10.2307/2533269
    [34] Genest C, Rémillard B, Beaudoin D (2009) Goodness-of-fit tests for copulas: A review and a power study. Insur: Math Econ 44: 199–213. doi: 10.1016/j.insmatheco.2007.10.005
    [35] Patton A (2013) Copula methods for forecasting multivariate time series. Handb Econ Forecasting 2: 899–960. doi: 10.1016/B978-0-444-62731-5.00016-6
  • Reader Comments
  • © 2019 the Author(s), licensee AIMS Press. This is an open access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0)
通讯作者: 陈斌, bchen63@163.com
  • 1. 

    沈阳化工大学材料科学与工程学院 沈阳 110142

  1. 本站搜索
  2. 百度学术搜索
  3. 万方数据库搜索
  4. CNKI搜索

Metrics

Article views(3644) PDF downloads(563) Cited by(6)

Article outline

Figures and Tables

Figures(3)  /  Tables(4)

Other Articles By Authors

/

DownLoad:  Full-Size Img  PowerPoint
Return
Return

Catalog