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Conditional dependence structure between oil prices and exchange rates: A copula-GARCH approach

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  • Aloui, Riadh
  • Ben Aïssa, Mohamed Safouane
  • Nguyen, Duc Khuong

Abstract

We study the conditional dependence structure between crude oil prices and U.S. dollar exchange rates using a copula-GARCH approach. Various copula functions of the elliptical, Archimedean and quadratic families are used to model the underlying dependence structure in both bearish and bullish market phases. Over the 2000–2011 period, we find evidence of significant and symmetric dependence for almost all the oil-exchange rate pairs considered. The rise in the price of oil is found to be associated with the depreciation of the dollar. Moreover, we show that Student-t copulas best capture the extreme dependence, and that taking the extreme comovement into account leads to improve the accuracy of VaR forecasts. Our main results remain unchanged when considering alternative GARCH-type specifications and the crisis period, but are sensitive to the use of raw returns.

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  • Aloui, Riadh & Ben Aïssa, Mohamed Safouane & Nguyen, Duc Khuong, 2013. "Conditional dependence structure between oil prices and exchange rates: A copula-GARCH approach," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 719-738.
    • Handle: RePEc:eee:jimfin:v:32:y:2013:i:c:p:719-738
    DOI: 10.1016/j.jimonfin.2012.06.006
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    More about this item

    Keywords

    Copulas; Dependence measures; Crude oil price; U.S. dollar exchange rates; CML method;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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