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Do crude oil prices and the sentiment index influence foreign exchange rates differently in oil-importing and oil-exporting countries? A dynamic connectedness analysis

Jin Shang and Shigeyuki Hamori ()

Resources Policy, 2021, vol. 74, issue C

Abstract: With growing interest in the spillover effects of returns and volatility in the cross-market between the crude oil market and the foreign exchange market, alongside the rapid development in the social network, we are also intrigued by determining the dynamic connectedness of these cross markets. We utilized the TVP-VAR approach to investigate the daily time-varying connectedness of the foreign exchange rates of the six leading oil-importing and oil-exporting countries. Furthermore, this study compares how the impacts of crude oil prices and the sentiment index vary between oil-exporting countries and oil-importing countries, particularly during the 2020 crude oil crash. A network topology analysis is used to visualize the network connectedness between crude oil markets, foreign exchange markets, and the news sentiment on the most volatile days in 2020. In terms of returns, results show that WTI had greater spillover effects on the exchange rates of oil-importing countries; in most cases, the sentiment index was more of a directional spillover receiver. The situation changed slightly during the COVID-19 pandemic. In terms of volatilities, the WTI spillover effect was generally transmitted to the foreign exchange rates from the countries that are more dependent on U.S. oil imports and have more co-movement with the price of crude oil; the sentiment can be similarly explained, and the situation during the COVID-19 pandemic is consistent with the results of volatilities.

Keywords: Dynamic connectedness; TVP-VAR; Foreign exchange; Crude oil; Sentiment index; Oil-importing; Oil-exporting; COVID-19 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.resourpol.2021.102400

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