Does crude oil fire the emerging markets currencies contagion spillover? A systemic perspective

Pawan Kumar and Vipul Kumar Singh

Energy Economics, 2022, vol. 116, issue C

Abstract: The paper lays the empirical foundation for the significance of Crude in explaining the variation in implied volatilities (IVs) of emerging markets nations constituting the MSCI emerging market index. Guided by the significance of Crude as a significant regressor, the study aims to investigate the association of currency IVs with Crude using a connectedness-based approach by Diebold and Yilmaz (2012). The spillover pattern highlights the strong interconnectedness of Asian currencies, with the Taiwanese dollar and Thai Baht feeding the systemic risk, thus the currencies to watch out for the policymakers. An important finding is that the Polish zloty possesses a high spillover risk in the Eastern European economies due to improved economic conditions and a large flow of capital during quantitative easing. On the other hand, Russia is a huge exporter of Crude and shares a limited spillover relationship with Crude, implying domestic macroeconomic conditions and geopolitical risk contribute more to the ruble fall. Based on the spillover pattern of IVs, a portfolio universe selection and weight allocation with dynamic balancing have been devised for investors of the forex market for spillover risk minimization. Findings show that the Chinese Yuan and Chilean Peso are the most favorable currency alongside Crude. However, Indian Rupee serves as the most promising currency pair to be inducted with Crude. The study is particularly beneficial for investors and portfolio managers investing in the forex market to induct the assets in the portfolio to mitigate systemic risk fear, especially during times of distress.

Keywords: Crude oil; Exchange rate; Emerging markets; GFEVD; Implied volatility; Network; Minimum spillover portfolio (search for similar items in EconPapers)
JEL-codes: C58 E44 F15 G15 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0140988322005138
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:116:y:2022:i:c:s0140988322005138

DOI: 10.1016/j.eneco.2022.106384

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 ().