Exchange rates and commodity prices: Measuring causality at multiple horizons

Hui Jun Zhang, Jean-Marie Dufour () and John Galbraith

Journal of Empirical Finance, 2016, vol. 36, issue C, 100-120

Abstract: Different causal mechanisms have been proposed to link commodity prices and exchange rates, with opposing implications. We examine these causal relationships empirically, using data on three commodities (crude oil, gold, copper) and four countries (Canada, Australia, Norway, Chile), over the period 1986–2015. To go beyond pure significance tests of Granger non-causality and provide a relatively complete picture of the links, measures of the strength of causality for different horizons and directions are estimated and compared. Since low-frequency data may easily fail to capture important features of the relevant causal links, daily and some 5-minute data are exploited. Both unconditional and conditional (given general stock market conditions and short-term interest rates) causality measures are considered, and allowance for “dollar effects” is made by considering non-U.S. dollar exchange rates. We identify clear causal patterns: (1) there is evidence of Granger-causality between commodity prices and exchange rates in both directions across multiple horizons, but the statistical evidence and measured intensity of the effects are much stronger in the direction of commodity prices to exchange rates, especially at horizon one: the ratios of causality measures in two different directions can be quite high; (2) causality is stronger at short horizons, and becomes weaker as the horizon increases; (3) conditioning on equity prices (the S&P500) does not change the patterns of causality measures found in the unconditional cases; (4) the main results are robust to eliminating U.S.-dollar denomination effects and including a short-term interest rate as the conditioning variable. In contrast with earlier results on the non-predictability of exchange rates, we find that the macroeconomic/trade-based mechanism plays a central role in exchange-rate dynamics, despite the financial feature of these markets.

Keywords: Multi-horizon causality; Causality measures; Commodity prices; Exchange rates; Spurious causality (search for similar items in EconPapers)
JEL-codes: F31 G15 G17 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (72)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0927539815001036
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Exchange rates and commodity prices: measuring causality at multiple horizons (2013)
Working Paper: Exchange Rates and Commodity Prices: Measuring Causality at Multiple Horizons (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:36:y:2016:i:c:p:100-120

DOI: 10.1016/j.jempfin.2015.10.005

Access Statistics for this article

Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

More articles in Journal of Empirical Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().