Conditional Dynamic Dependence and Risk Spillover between Crude Oil Prices and Foreign Exchange Rates: New Evidence from a Dynamic Factor Copula Model

Xu Wang, Xueyan Wu and Yingying Zhou
Additional contact information
Xu Wang: Jiangsu Key Laboratory of Coal-Based Greenhouse Gas Control and Utilization, School of Economics and Management, China University of Mining and Technology, Xuzhou 221116, China
Xueyan Wu: Jiangsu Key Laboratory of Coal-Based Greenhouse Gas Control and Utilization, School of Economics and Management, China University of Mining and Technology, Xuzhou 221116, China
Yingying Zhou: Jiangsu Key Laboratory of Coal-Based Greenhouse Gas Control and Utilization, School of Economics and Management, China University of Mining and Technology, Xuzhou 221116, China

Energies, 2022, vol. 15, issue 14, 1-21

Abstract: This paper proposes a dynamic factor model to accurately characterize the dynamic dependence and risk spillovers between the crude oil and exchange rate returns of oil-trading countries from 2000–2020, conditional on the common factors. To this end, we first identify the common factors related to returns of crude oil prices and exchange rates from 14 typical oil-trading countries. Then, we use the AR-GARCH model to filter the respective idiosyncratic factors and conduct a comparative study of conditional dynamic dependence between the crude oil and exchange rate returns of oil importers and exporters. Finally, we combine the dynamic factor copula model with the CoVaR method to measure the conditional risk spillover effect between crude oil and exchange rate markets. The empirical study indicates that the classical factor analysis can be used to precisely identify the common factors related to both financial markets, with the similar trend of macro-economic indicators. Furthermore, the factor copula model can capture the dynamic structure between crude oil and exchange rate markets more accurately than the traditional Copula–GARCH model. Specifically, the idiosyncratic factors related to each return series still have a significant impact on the dependence between the crude oil and exchange rate returns of oil importers, while the common factors have played an important role in the relationship of oil exporters’ exchange rates with crude oil prices. Finally, the crude oil market has enjoyed a relative risk premium to the exchange rate markets of oil-trading countries. However, there is almost no conditional risk spillover from the corresponding exchange rates to the crude oil prices. Finally, we discuss the implications for investors, policymakers and respective exchange rate regulators from oil-trading countries with further insights from the macro-economic perspective.

Keywords: factor copula model; common factors; dynamic dependence; risk spillover effect; crude oil price; exchange rate returns (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: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.mdpi.com/1996-1073/15/14/5220/pdf (application/pdf)
https://www.mdpi.com/1996-1073/15/14/5220/ (text/html)

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:gam:jeners:v:15:y:2022:i:14:p:5220-:d:865984

Access Statistics for this article

Energies is currently edited by Ms. Agatha Cao

More articles in Energies from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().