Effect of Oil Prices on Exchange Rate Movements in Korea and Japan Using Markov Regime-Switching Models

Suyi Kim, So-Yeun Kim and Kyungmee Choi
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Suyi Kim: College of Business Management, Hongik University, Sejong 30016, Korea
So-Yeun Kim: College of Business Management, Hongik University, Sejong 30016, Korea
Kyungmee Choi: College of Science and Technology, Hongik University, Sejong 30016, Korea

Energies, 2020, vol. 13, issue 17, 1-16

Abstract: We examined the effects of oil prices along with fundamental economic variables on exchange rate movements in the Korean and Japanese foreign exchange markets, using two-regime Markov Regime Switching Models (MRSMs) over the period from January 1991 to March 2019. We selected the best MRSMs explaining their exchange rate movements using the Maximum Log-Likelihood and Akaike Information Criteria, and analyze effects of oil prices on their exchange rates based on the selected best MRSMs. We consider two regimes, regime 1 with high-volatility and regime 2 with low-volatility. In Korea, two apparent regimes are observed, and unstable regime 1 consists of two distinct prolonged periods, the 1997 Asian Financial Crisis and the 2008 Global Financial Crisis. Meanwhile in Japan, no evident prolonged regimes are observed. Rather, the two regimes occasionally alternate. Oil prices influence exchange rate movements in regime 2 with low-volatility in Korea, while they do not influence exchange rate movements in either regimes in Japan. The Japanese foreign exchange market is more resistant to external oil price shocks because the Japanese industry and economy has less dependence on oil than Korea.

Keywords: oil prices; exchange rates; trade balance; industrial production index; Markov regime-switching model (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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