Time-varying connectedness and causality between oil prices and G7 economies exchange rates. Evidence from the COVID-19 and Russia-Ukraine crises

Ngo Thai Hung

Studies in Economics and Finance, 2023, vol. 40, issue 5, 814-838

Abstract: Purpose - This study aims to attempt to investigate the time-varying causality and price spillover effects between crude oil and exchange rate markets in G7 economies during the COVID-19 and Russia–Ukraine crises. Design/methodology/approach - This study uses time-varying Granger causality test and spillover index. Findings - This study finds a time-varying causality between exchange rate returns and oil prices, implying that crude oil prices have the predictive power of the foreign exchange rate markets in G7 economies in their domain. Furthermore, the total spillover index is estimated to fall significantly around COVID-19 and war events. However, this index is relatively high – more than 57% during the first wave of COVID-19 and decreasing slightly during the Russia–Ukraine conflict. Practical implications - This outcome supports the hypothesis that the majority of the time-varying interaction between exchange rates and oil prices takes place in the short term. As a result, the time-varying characteristics provide straightforward insight for investors and policymakers to fully understand the intercorrelation between oil prices and the G7 exchange rate markets. Originality/value - First, this study has reexamined the oil–exchange rate nexus to highlight new evidence using novel time-varying Granger causality model recently proposed byShiet al.(2018)and the spillover index proposed by Diebold and Yilmaz (2012). These approaches allow the author to improve understanding of time-varying causal associations and return transmission between exchange rates and oil prices. Second, compared to past papers, this paper has used data from December 31, 2019, to October 31, 2022, to offer a fresh and accurate structure between the markets, which indicates the unique experience of the COVID-19 outbreak and Russia–Ukraine war episodes. Third, this study analyzes a data set of seven advanced economies (G7) exhibiting significant variations in their economic situations and responding to global stress times.

Keywords: Oil prices; Exchange rates; G7; Causality; Connectedness; Russia–Ukraine war; C33; G11; G15 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eme:sefpps:sef-04-2023-0184

DOI: 10.1108/SEF-04-2023-0184

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