Modeling nonlinear Granger causality between the oil price and U.S. dollar: A wavelet based approach

François Benhmad

Economic Modelling, 2012, vol. 29, issue 4, 1505-1514

Abstract: In this paper, we use a wavelet approach to study the linear and nonlinear Granger causality between the real oil price and the real effective U.S. Dollar exchange rate. Instead of analyzing the time series at their original level, as it is usually done, we first decompose the two macroeconomic variables at various scales of resolution using wavelet decomposition and then we study the relationships among the decomposed series on a scale by scale basis. A major finding of this paper is that the linear and nonlinear causal relationships between the real oil price and the real effective U.S. Dollar exchange rate vary over frequency bands as it depends on the time scales. Indeed, there is a strong bidirectional causal relationship between the real oil price and the real dollar exchange rate for large time horizons, i.e. corresponding to fundamentalist traders, especially fund managers and institutional investors. But, for the first frequency band which corresponds to a class of traders whom investment horizon is about 3-months and whom trading is principally speculative (noise traders), the causality runs only from the real oil prices to real effective U.S dollar exchange rate.

Keywords: Granger causality; Wavelets; Real oil price; Real effective U.S. Dollar exchange rate (search for similar items in EconPapers)
JEL-codes: C22 E31 F31 Q43 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (137)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:29:y:2012:i:4:p:1505-1514

DOI: 10.1016/j.econmod.2012.01.003

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