Dynamic connectedness of oil price shocks and exchange rates |
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| Affiliation: | 1. College of Business, Zayed University, Dubai 19282, United Arab Emirates;2. College of Business, Zayed University, United Arab Emirates.;1. School of Business, Clarkson University, 8 Clarkson Avenue, Potsdam, NY 13699, United States;2. Clarkson University, Potsdam, NY 13699, United States;3. Department of Economics, Rochester Institute of Technology, 1 Lomb Memorial Dr, Rochester, NY 14623, United States;1. Business School, Shandong Normal University, Jinan, Shandong, 250014, China;2. Center for Energy and Environmental Policy research, Institutes of Science and Development, Chinese Academy of Sciences, Beijing 100190, China;3. School of Economics & Management, Beihang University, Beijing 100191, China;1. National Institute of Industrial Engineering (NITIE), Vihar Lake, P.O. NITIE, Mumbai 400087, India;2. Indian Institute of Technology, Guwahati, Assam 781039, India;3. McMaster University, DeGroote School of Business, 1280 Main Street West, Hamilton, Ontario L8S4L8, Canada |
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| Abstract: | Using a novel method of isolating the oil price shocks, we study how different sources of oil price shocks are connected to exchange rates of major oil-dependent countries using daily data from March 1996 to February 2019. We find that oil price shocks resulting from changes in demand and risk significantly contribute to variation in exchange rates, while supply shocks have virtually no impact. The connectedness of this relationship between oil price shocks and exchange rates has significantly increased after the global financial crisis. We also find that oil price shocks do not explain the variation in exchange rate volatility but we document significant volatility connectedness among exchange rates. Our findings have important implications for policy makers and financial market participants. |
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