Differential Tail Dependence between Crude Oil and Forex Markets in Oil-Importing and Oil-Exporting Countries during Recent Crisis Periods

Jin Shang and Shigeyuki Hamori
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Jin Shang: Graduate School of Economics, Kobe University, Kobe 657-8501, Japan

Sustainability, 2023, vol. 15, issue 19, 1-24

Abstract: The relationship between foreign exchange rates and crude oil prices holds significant importance in comprehending the dynamics of oil markets and their implications for diverse economies. This study utilizes the time-varying copula to examine the interrelationships between foreign exchange rates (FX) and West Texas Intermediate (WTI) crude oil prices, with a focus on time-varying tail dependence and time-varying linear correlation. We found that the tail dependence between foreign exchange rates (FX) and WTI crude oil prices is higher for oil-exporting countries compared to oil-importing countries. Moreover, the COVID-19 pandemic has further amplified the tail dependence for oil-exporting countries while simultaneously increasing the correlation of FXs–WTI for oil-importing countries. However, the 2022 Russian–Ukrainian conflict has exerted a significant receding effect on both the tail dependence and linear correlation of FXs–WTI, reaching or even surpassing levels comparable to those witnessed during the 2008 financial crisis. These results facilitate policymakers, investors, and market participants in making well-informed decisions and developing effective risk management strategies.

Keywords: foreign exchange rate; crude oil; dependence structure; tail dependence; COVID-19; Russian–Ukrainian war; time-varying copula; oil importing; oil exporting; value at risk; expected shortfall; risk hedge (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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