Modeling nonlinear Granger causality between the oil price and U.S. dollar: A wavelet based approach
AbstractIn this paper, we use a wavelet approach to study the linear and nonlinear Granger causality between the real oil price and the real effective U.S. Dollar exchange rate. Instead of analyzing the time series at their original level, as it is usually done, we first decompose the two macroeconomic variables at various scales of resolution using wavelet decomposition and then we study the relationships among the decomposed series on a scale by scale basis. A major finding of this paper is that the linear and nonlinear causal relationships between the real oil price and the real effective U.S. Dollar exchange rate vary over frequency bands as it depends on the time scales. Indeed, there is a strong bidirectional causal relationship between the real oil price and the real dollar exchange rate for large time horizons, i.e. corresponding to fundamentalist traders, especially fund managers and institutional investors. But, for the first frequency band which corresponds to a class of traders whom investment horizon is about 3-months and whom trading is principally speculative (noise traders), the causality runs only from the real oil prices to real effective U.S dollar exchange rate.
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Bibliographic InfoArticle provided by Elsevier in its journal Economic Modelling.
Volume (Year): 29 (2012)
Issue (Month): 4 ()
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Web page: http://www.elsevier.com/locate/inca/30411
Granger causality; Wavelets; Real oil price; Real effective U.S. Dollar exchange rate;
Find related papers by JEL classification:
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- F31 - International Economics - - International Finance - - - Foreign Exchange
- Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
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