Oil Prices, Exchange Rates and Asset Prices

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThis 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 code: F30; G15.

The impact of oil shocks on exchange rates: A Markov-switching approach

“…The terms of trade channel impacts both oil-exporting and oil-importing countries, albeit in different ways (e.g., Cordon and Neary, 1982;Amano and van Norden, 1998a,b;Backus and Crucini, 2000;Chen and Rogoff, 2003;and Cashin et al, 2004). For oil-importing countries, an increase in oil prices generally leads to a deterioration of the trade balance and subsequently to a depreciation of the local currency (Fratzscher et al, 2014). Whereas, for the oil-exporting countries, a positive terms of trade shock may eventually lead to a Dutch Disease phenomenon by driving up the price of the non-tradable goods and an appreciation of the real exchange rate (Buetzer et al, 2012).…”

“…According to this view, an increase in oil prices is associated with wealth transfer from oil-importers to oilexporters, which leads to a real depreciation (appreciation) of the exchange rates of oil-importing (oil-exporting) economies through current account imbalances and portfolio reallocation, respectively (e.g., Rasmussen and Roitman, 2011;Buetzer et al, 2012;and Fratzscher et al, 2014). The basic theoretical framework of this channel is developed by Golub (1983) and Krugman (1983), whereas the related empirical evidence can be found in Bénassy-Quéré et al (2007), Kilian et al (2009), andBodenstein et al (2011).…”

“…Given the uncertainty about the direction of causality between oil prices and asset prices (including exchange rates), Fratzscher et al (2014) use an identification procedure in a structural VAR that exploits the heteroscedasticity in the data that allows them to separate the contemporaneous causality between oil prices and exchange rates from changes due to other observable and unobservable factors. Their results reveal that the causality between exchange rates and oil prices runs in both directions: a 10% increase in the price of oil leads to a 0.28% depreciation of the US dollar effective exchange rate on impact; whereas, a weakening of the US dollar by 1% causes oil price to rise by 0.73%.…”

“…On the other hand, Akram (2009) applies a structural VAR model and finds instead that a weaker (real) US dollar leads to higher real oil prices in the period 1990 to 2007. Fratzscher et al (2014) also employ a structural VAR that includes the effective US dollar exchange rate along with a measure of options exchange market volatility and a proxy for the financialisation of the oil market. Five episodes of different time-varying correlation (heteroscedasticity) regimes are calculated from VAR residuals in order to aid with the identification of structural shocks.…”

Exchange Rates of Oil Exporting Countries and Global Oil Price Shocks: A Nonlinear Smooth-Transition Approach

“…An increase in oil prices is associated with a wealth transfer from oil-importing to oil-exporting countries that leads to a real appreciation of the exchange rates of the oil-exporting country due to portfolio reallocations (e.g., Buetzer et al, 2012, andFratzscher et al, 2014). The basic theory for the wealth channel was developed by Golub (1983) and Krugman (1983), and related empirical evidence was presented in Kilian et al (2009) and Bodenstein et al (2011), among others.…”