Estimating volatility transmission between oil prices and the US Dollar exchange rate under structural breaks

Hassan Anjum ()
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Hassan Anjum: Texas Tech University

Journal of Economics and Finance, 2019, vol. 43, issue 4, No 6, 750-763

Abstract: Abstract This study examines volatility dynamics of oil prices and the US dollar exchange rate using univariate and bivariate GARCH models using data from January 2, 2000 to December 31, 2015. The modified iterative cumulative sum of square (ICSS) algorithm is employed to identify structural breaks in the variance of the two return series. I find no evidence of volatility transmission between oil prices and the US dollar exchange rate if structural breaks are ignored in the model. However, after accounting for structural breaks in variance in the bivariate GARCH model, I find significant volatility transmission between oil prices and the US dollar exchange rate. I also show that dynamic risk minimizing hedge ratios substantially change when breaks are incorporated in the bivariate GARCH model.

Keywords: Volatility transmission; Oil volatility; Exchange rate volatility; Structural breaks; GARCH (search for similar items in EconPapers)
JEL-codes: G1 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (19)

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DOI: 10.1007/s12197-019-09472-w

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