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

Ngo Thai Hung; Ngo Thai Hung

doi:10.3934/energy.2019.4.465

AIMS Energy

2019, Volume 7, Issue 4: 465-482. doi: 10.3934/energy.2019.4.465

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

Ngo Thai Hung ^,

University of Finance-Marketing, Ho Chi Minh city, Vietnam

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.
- oil,
- exchange rate,
- copula,
- GARCH
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

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Abstract

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.

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