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Exchange rates and commodity prices: Measuring causality at multiple horizons

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  • Zhang, Hui Jun
  • Dufour, Jean-Marie
  • Galbraith, John W.

Abstract

Different causal mechanisms have been proposed to link commodity prices and exchange rates, with opposing implications. We examine these causal relationships empirically, using data on three commodities (crude oil, gold, copper) and four countries (Canada, Australia, Norway, Chile), over the period 1986–2015. To go beyond pure significance tests of Granger non-causality and provide a relatively complete picture of the links, measures of the strength of causality for different horizons and directions are estimated and compared. Since low-frequency data may easily fail to capture important features of the relevant causal links, daily and some 5-minute data are exploited. Both unconditional and conditional (given general stock market conditions and short-term interest rates) causality measures are considered, and allowance for “dollar effects” is made by considering non-U.S. dollar exchange rates. We identify clear causal patterns: (1) there is evidence of Granger-causality between commodity prices and exchange rates in both directions across multiple horizons, but the statistical evidence and measured intensity of the effects are much stronger in the direction of commodity prices to exchange rates, especially at horizon one: the ratios of causality measures in two different directions can be quite high; (2) causality is stronger at short horizons, and becomes weaker as the horizon increases; (3) conditioning on equity prices (the S&P500) does not change the patterns of causality measures found in the unconditional cases; (4) the main results are robust to eliminating U.S.-dollar denomination effects and including a short-term interest rate as the conditioning variable. In contrast with earlier results on the non-predictability of exchange rates, we find that the macroeconomic/trade-based mechanism plays a central role in exchange-rate dynamics, despite the financial feature of these markets.

Suggested Citation

  • Zhang, Hui Jun & Dufour, Jean-Marie & Galbraith, John W., 2016. "Exchange rates and commodity prices: Measuring causality at multiple horizons," Journal of Empirical Finance, Elsevier, vol. 36(C), pages 100-120.
  • Handle: RePEc:eee:empfin:v:36:y:2016:i:c:p:100-120
    DOI: 10.1016/j.jempfin.2015.10.005
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    Cited by:

    1. repec:eee:jrpoli:v:53:y:2017:i:c:p:340-346 is not listed on IDEAS
    2. Zhang, Hui Jun & Dufour, Jean-Marie & Galbraith, John W., 2016. "Exchange rates and commodity prices: Measuring causality at multiple horizons," Journal of Empirical Finance, Elsevier, vol. 36(C), pages 100-120.
    3. Wen, Shaobo & An, Haizhong & Chen, Zhihua & Liu, Xueyong, 2017. "Driving factors of interactions between the exchange rate market and the commodity market: A wavelet-based complex network perspective," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 479(C), pages 299-308.
    4. MAO TAKONGMO, Charles Olivier, 2016. "Government spending, GDP and exchange rate in Zero Lower Bound: measuring causality at multiple horizons," MPRA Paper 79703, University Library of Munich, Germany, revised 02 Jun 2017.
    5. repec:eee:eneeco:v:67:y:2017:i:c:p:476-495 is not listed on IDEAS
    6. Olivier Rousse & Benoît Sévi, 2016. "Informed Trading in Oil-Futures Market," Working Papers hal-01410093, HAL.
    7. Michele Patanè & Mattia Tedesco & Stefano Zedda, 2017. "Dynamic Relationship of Commodities prices and EUR/USD exchange rate trends in the recent past," Department of Economics University of Siena 759, Department of Economics, University of Siena.
    8. repec:eee:finlet:v:24:y:2018:i:c:p:247-255 is not listed on IDEAS
    9. repec:eee:eneeco:v:66:y:2017:i:c:p:399-410 is not listed on IDEAS
    10. José Renato Haas Ornelas & Roberto Baltieri Mauad, 2017. "Volatility Risk Premia and Future Commodity Returns," Working Papers Series 455, Central Bank of Brazil, Research Department.
    11. Werner Kristjanpoller R. & Alejandro Sierra C., 2014. "Relationship between the dollar, the price of copper and the IPSA indifferent time scales: An approach through Wavelet," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 17(3), pages 56-85, December.
    12. repec:eee:phsmap:v:486:y:2017:i:c:p:168-182 is not listed on IDEAS
    13. José Renato Haas Ornelas & Roberto Baltieri Mauad, 2017. "Volatility risk premia and future commodities returns," BIS Working Papers 619, Bank for International Settlements.

    More about this item

    Keywords

    Multi-horizon causality; Causality measures; Commodity prices; Exchange rates; Spurious causality;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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