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Total, asymmetric and frequency connectedness between oil and forex markets

Jozef Barun\'ik and Ev\v{z}en Ko\v{c}enda
Authors registered in the RePEc Author Service: Jozef Baruník () and Evžen Kočenda ()

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Abstract: We analyze total, asymmetric and frequency connectedness between the oil and forex markets using high-frequency intra-day data over 2007 -- 2015. Methodologically, we extend the Diebold-Yilmaz spillover index in two ways to account for asymmetric and frequency connectedness. Empirically, our results show that by combining crude oil with the set of currencies a total connectedness of the portfolio is lower than the total connectedness of the forex market itself. Further, in terms of asymmetries we show that bad volatility dominates connectedness on the forex market. However, when we add oil into a hypothetical portfolio of oil and foreign currencies, asymmetry in connectedness between the two classes of assets reverses in favor of the good volatility. Finally, the frequency connectedness analysis reveals that dynamic of the shorter and longer term connectedness dramatically differs. While shorter-term connectedness is usually low, the long-term connectedness sharply rises during the global financial crisis, European debt crisis, and after the oil price drop in 2014. Hence, the long-term connectedness reflects worrisome beliefs of investors and correlates with the increased market uncertainty.

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Date: 2018-05
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