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Oil Prices, Exchange Rates and Asset Prices

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  • Marcel Fratzscher
  • Daniel Schneider
  • Ine Van Robays

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.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.421479.de/dp1302.pdf
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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1302.

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Length: 39 p.
Date of creation: 2013
Date of revision:
Handle: RePEc:diw:diwwpp:dp1302

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Keywords: oil prices; asset prices; exchange rates; US dollar; identification; time-varying correlation;

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Citations

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Cited by:
  1. Jozef Barunik & Evzen Kocenda & Lukas Vacha, 2014. "How does bad and good volatility spill over across petroleum markets?," Papers 1405.2445, arXiv.org.
  2. Jozef Barunik & Evzen Kocenda & Lukas Vacha, 2013. "Gold, Oil, and Stocks," Papers 1308.0210, arXiv.org, revised Mar 2014.

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