Oil prices, exchange rates and asset prices

Daniel Schneider, Ine Van Robays and Marcel Fratzscher

No 1689, Working Paper Series from European Central Bank

Abstract: This paper takes a financial market perspective in examining the relationship between oil prices, the US dollar and asset prices, and it exploits the heteroskedasticity for the identification of causality in a multifactor model. It finds a bidirectional causality between the US dollar and oil prices since the early 2000s. Moreover, both oil prices and the US dollar are significantly affected by changes in equity market returns and risk. By contrast, oil prices did not react to changes in these financial assets before 2001. The paper provides evidence that this may be explained by the increased use of oil as a financial asset over the past decade, which intensified the link between oil and other assets. The model can account well for the strong and rising negative correlation between oil prices and the US dollar since the early 2000s, with risk shocks and the financialisation process of oil prices explaining most of the strengthening of this correlation. JEL Classification: F30, G15

Keywords: Asset Prices; exchange rates; identification; oil prices; time-varying correlation; US dollar (search for similar items in EconPapers)
Date: 2014-07
New Economics Papers: this item is included in nep-ene, nep-ifn and nep-opm
Note: 335955
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (79)

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Related works:
Working Paper: Oil Prices, Exchange Rates and Asset Prices (2013)
Working Paper: Oil Prices, Exchange Rates and Asset Prices (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20141689

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