Oil tail risk and the tail risk of the US Dollar exchange rates

Afees Salisu, Abeeb Olaniran and Jean Paul Tchankam

Energy Economics, 2022, vol. 109, issue C

Abstract: This study tests both the in-sample and out-of-sample predictive value of oil tail risk for the tail risk of US Dollar exchange rates (USD/CAD, USD/GBP and USD/JPY), where the conditional autoregressive value at risk (CAViaR) of the Engle and Manganelli (2004) is used to estimate the tail risks under 1% and 5% VaRs. Thereafter, we construct a predictive model using the best fit tail risks while the predictive value of the oil tail risk is evaluated for both the in-sample and out-of-sample forecasts. We find evidence of a positive association between the oil tail risk and the USD tail risks when the USD/CAD, USD/GBP are considered, where downtowns in the oil markets are capable of causing instabilities in the U.S. foreign exchange market while it is negative for USD/JPY albeit at 5% VaR, suggesting the safe haven property of the latter during oil crisis. Accounting for the dynamics of oil tail risk in the predictive model of the tail risks of USD exchange rates improves both the in-sample and out-of-sample forecasts and the outcome leading to these conclusions is insensitive to the choice of oil price proxy and the magnitude of VaR.

Keywords: Tail risks; Oil market; US/GBP; Predictability; Forecast evaluation (search for similar items in EconPapers)
JEL-codes: C53 D81 F31 G32 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0140988322001360
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:109:y:2022:i:c:s0140988322001360

DOI: 10.1016/j.eneco.2022.105960

Access Statistics for this article

Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

More articles in Energy Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().