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The Dynamic Effects of Oil Price Shocks on Exchange Rates—From a Time-Varying Perspective

Rufei Zhang, Haizhen Zhang, Wang Gao, Ting Li and Shixiong Yang
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Rufei Zhang: Research Center of Natural Resources Assets, Hebei GEO University, Shijiazhuang 050031, China
Haizhen Zhang: School of Economics, Hebei GEO University, Shijiazhuang 050031, China
Wang Gao: School of Finance, Hebei University of Economics and Business, Shijiazhuang 050062, China
Ting Li: School of Economics, Hebei GEO University, Shijiazhuang 050031, China
Shixiong Yang: School of Statistics, Renmin University of China, Beijing 100872, China

Sustainability, 2022, vol. 14, issue 14, 1-20

Abstract: This study investigates the time-varying effects of three types of oil price shocks (oil demand, supply, and risk shock) on exchange rates by applying the time-varying parameter structural vector autoregression stochastic volatility (TVP-SVAR-SV) model. Through examining the impulse response of exchange rates to oil price shocks at different lag periods and time points, this paper contributes to the existing literature on the dynamic relationship between oil shocks and exchange rates. From the response at different lag periods, we find that oil price shocks have a significant time-varying impact on the exchange rate, among which oil demand shock has the most significant effect. The response of the exchange rate market to oil price shock shows an obvious short-term time-varying effect and is positive and negative alternately, with a certain periodicity. From the response at different time points, the time-varying effect of oil price shock on exchange rates is related to external shock, and is more intense during the global economic and political turmoil. This is the first empirical study using a novel method to examine the time-varying effects of oil price shock from different sources on exchange rates, providing investors and policy makers assistance to manage foreign exchange during global turmoil periods.

Keywords: oil price shock; exchange rate; time-varying effect; TVP-SVAR-SV model (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2022
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