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What determines the long-term correlation between oil prices and exchange rates?

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  • Yang, Lu
  • Cai, Xiao Jing
  • Hamori, Shigeyuki

Abstract

In this study, we obtain the long-term correlation between oil prices and exchange rates by employing the dynamic conditional correlation-mixed data sampling (DCC-MIDAS) model. We then identify the factors that influence the long-term correlation using panel data analysis. We find that the long-run correlations between oil prices and exchange rates are negative for all oil-exchange rate markets except Japan. We also find that both inflation and term spread have negative effects, while the risk-free interest rate has a positive effect on the long-term correlation between oil prices and exchange rates. Importantly, the empirical results show that an increase in inflation will significantly damage the real value of the currency itself.

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  • Yang, Lu & Cai, Xiao Jing & Hamori, Shigeyuki, 2018. "What determines the long-term correlation between oil prices and exchange rates?," The North American Journal of Economics and Finance, Elsevier, vol. 44(C), pages 140-152.
    • Handle: RePEc:eee:ecofin:v:44:y:2018:i:c:p:140-152
    DOI: 10.1016/j.najef.2017.12.003
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    More about this item

    Keywords

    Oil price; Exchange rate; GARCH-MIDAS; DCC-MIDAS;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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