Analyzing shifts in structural dependence between oil prices and exchange rates in oil-importing economies

Woraphon Yamaka

Asian Journal of Economics and Banking, 2024, vol. 9, issue 1, 48-63

Abstract: Purpose - The primary purpose of this study is to unveil the relationship between oil prices and exchange rates, with a specific focus on five major oil-importing countries. By examining this relationship, the research aims to provide valuable insights for policymakers, investors and stakeholders operating in the global economic landscape. Design/methodology/approach - The study employs a methodological approach to ensure robust and reliable findings. First, we assess the stationarity of the time series data to establish a solid analytical foundation. Subsequently, we construct GARCH(1,1) models to capture the persistence of the volatilities inherent in the data. Building upon this, we propose the novel application of the Markov-switching R-vine copula approach, which enables us to capture structural changes and measure the dependencies between oil prices and exchange rates. Findings - Our findings uncover significant negative relationships between oil prices and exchange rates across the examined economies while revealing varying degrees of interdependency among these variables. Notably, we elucidate distinct tail dependence structures, encompassing both symmetric and asymmetric aspects, which hold profound implications for risk assessment and portfolio management strategies. Furthermore, this study confirms the presence of regime-switching dynamics, elucidating how the co-movement patterns between oil prices and exchange rates evolve across different states or regimes, reflecting the dynamic nature of these interconnected markets. Originality/value - The originality and value of this study lie in its comprehensive approach to understanding the relationship between oil prices and exchange rates. By accounting for structural changes and regime-switching behaviors, the research provides a nuanced understanding of the complex dynamics at play. The novel application of the Markov-switching R-vine copula approach contributes to the methodological advancement in this field of study. Furthermore, the insights derived from this research offer practical implications for policymakers, investors and stakeholders navigating the complexities of the global economic landscape, enabling them to make informed decisions and develop effective strategies to mitigate risks and capitalize on opportunities.

Keywords: Exchange rate; Oil-importing countries; Regime dependence switching; C58 Financial econometrics; C50 Econometric modeling: General; E37 Prices; Business fluctuations; Cycles: Forecasting and simulation: Models and applications (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ajebpp:ajeb-05-2024-0057

DOI: 10.1108/AJEB-05-2024-0057

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