What determines the long-term correlation between oil prices and exchange rates?

Lu Yang, Xiao Jing Cai and Shigeyuki Hamori

The North American Journal of Economics and Finance, 2018, vol. 44, issue C, 140-152

Abstract: In this study, we obtain the long-term correlation between oil prices and exchange rates by employing the dynamic conditional correlation-mixed data sampling (DCC-MIDAS) model. We then identify the factors that influence the long-term correlation using panel data analysis. We find that the long-run correlations between oil prices and exchange rates are negative for all oil-exchange rate markets except Japan. We also find that both inflation and term spread have negative effects, while the risk-free interest rate has a positive effect on the long-term correlation between oil prices and exchange rates. Importantly, the empirical results show that an increase in inflation will significantly damage the real value of the currency itself.

Keywords: Oil price; Exchange rate; GARCH-MIDAS; DCC-MIDAS (search for similar items in EconPapers)
JEL-codes: F3 G15 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:44:y:2018:i:c:p:140-152

DOI: 10.1016/j.najef.2017.12.003

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