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Is Exchange Rate Volatility Symmetric to Oil Price Volatility? An Investigation for India

Vinish Kathuria () and Jyotirmayee Sabat ()
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Vinish Kathuria: Indian Institute of Technology (IIT)
Jyotirmayee Sabat: NERA Economic Consulting

Journal of Quantitative Economics, 2020, vol. 18, issue 3, No 3, 525-550

Abstract: Abstract The studies involving finding a relation between oil prices and the exchange rate have often looked the relationship when the oil price was rising. Will the impact mirror for declining oil prices too? Or how the exchange rate behaves when oil prices are just volatile without any appreciable change in price. This study contributes to the literature to see the effect of oil prices on the exchange rate for different episodes for India using daily data for twenty years period. The study finds that the return of oil price and exchange rate relationship exhibit time-varying volatility in five of the total ten sub-periods in the last 20 years. GARCH and EGARCH models are then employed to study the impact of oil price shock on the nominal exchange rate for those periods. The study finds (a) not all periods have varying volatility, (b) for two of the volatile period, an increase in the oil price return leads to depreciation of the Indian currency vis-à-vis US dollar, (c) in line with other studies, we find that shocks to exchange rate have an asymmetric effect, and (d) oil price shocks have a permanent effect on exchange rate volatility.

Keywords: Oil price; Exchange rate; Asymmetric impact; EGARCH; India (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s40953-020-00212-0

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Handle: RePEc:spr:jqecon:v:18:y:2020:i:3:d:10.1007_s40953-020-00212-0