Nonlinear responses of crude oil prices to the US dollar exchange rates: the role of inventories

Zhepeng Hu () and Lei Yan ()
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Zhepeng Hu: China Agricultural University
Lei Yan: Yale University

Empirical Economics, 2024, vol. 66, issue 4, No 3, 1510 pages

Abstract: Abstract It has been widely documented that the relationship between crude oil prices and the value of US dollar changes over time (Beckmann et al. in Energy Econ 88:104772, 2020). However, the underlying economic driver for the time-varying relationship is not clear. Based on the competitive storage theory, we provide theoretical evidence that greater inelasticity of market demand for crude oil induced by low inventories is expected to lead to higher responsiveness of crude oil prices to exchange rate changes. We empirically test this hypothesis using the threshold vector autoregressive (TVAR) model and show that crude oil prices respond to shocks to the US dollar exchange rates in an asymmetric manner. Changes in the US dollar exchange rates have greater and more significant influence on crude oil prices in the low-inventory regime than in the high-inventory regime.

Keywords: Competitive storage; Oil price; Exchange rate; US dollar; TVAR (search for similar items in EconPapers)
JEL-codes: C32 F31 Q41 Q43 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s00181-023-02502-x

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