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Exchange rates and oil prices: A multivariate stochastic volatility analysis

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  • Ding, Liang
  • Vo, Minh

Abstract

This paper uses the multivariate stochastic volatility (MSV) and the multivariate GARCH (MGARCH) models to investigate the volatility interactions between the oil market and the foreign exchange (FX) market, in an attempt to extract information intertwined in the two for better volatility forecast. Our analysis takes into account structural breaks in the data. We find that when the markets are relatively calm (before the 2008 crisis), both oil and FX markets respond to shocks simultaneously and therefore no interaction is detected in daily data. However, during turbulent time, there is bi-directional volatility interaction between the two. In other words, innovations that hit one market also have some impact on the other at a later date and thus using such a dependence significantly improves the forecasting power of volatility models. The MSV models outperform others in fitting the data and forecasting exchange rate volatility. However, the MGARCH models do better job in forecasting oil volatility.

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Bibliographic Info

Article provided by Elsevier in its journal The Quarterly Review of Economics and Finance.

Volume (Year): 52 (2012)
Issue (Month): 1 ()
Pages: 15-37

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Handle: RePEc:eee:quaeco:v:52:y:2012:i:1:p:15-37

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Web page: http://www.elsevier.com/locate/inca/620167

Related research

Keywords: Oil price risk; Exchange rate risk; Multivariatestochastic volatility; Multivariate GARCH; Volatility forecast;

References

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Citations

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Cited by:
  1. Salisu, Afees A. & Mobolaji, Hakeem, 2013. "Modeling returns and volatility transmission between oil price and US–Nigeria exchange rate," Energy Economics, Elsevier, vol. 39(C), pages 169-176.
  2. Tiwari, Aviral Kumar & Mutascu, Mihai Ioan & Albulescu, Claudiu Tiberiu, 2013. "The influence of the international oil prices on the real effective exchange rate in Romania in a wavelet transform framework," Energy Economics, Elsevier, vol. 40(C), pages 714-733.
  3. Gazi Salah Uddin & Aviral Kumar Tiwari, 2013. "Measuring co-movement of oil price and exchange rate differential in Bangladesh," Economics Bulletin, AccessEcon, vol. 33(3), pages 1922-1930.

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