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The extreme value in crude oil and US dollar markets

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  • Chen, Wei-Peng
  • Choudhry, Taufiq
  • Wu, Chih-Chiang

Abstract

This study constructs a flexible range-based volatility model by considering extreme-value information to explore the volatility and dependence structures between the oil price and the US dollar exchange rate. An asset-allocation strategy is implemented to evaluate the economic value and confirm the efficiency of this model. The empirical results indicate that the use of extreme-value information can not only enhance the explanatory power of volatility structures, but also sort out the asymmetric volatility effect in the oil market. Besides, investors can obtain extra benefits of between 72 and 713 annualized basis points by incorporating extreme-value information into their asset-allocation strategies; less risk-averse investors can generate higher benefits. The empirical results have potentially important implications for asset allocation and risk management.

Suggested Citation

  • Chen, Wei-Peng & Choudhry, Taufiq & Wu, Chih-Chiang, 2013. "The extreme value in crude oil and US dollar markets," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 191-210.
  • Handle: RePEc:eee:jimfin:v:36:y:2013:i:c:p:191-210
    DOI: 10.1016/j.jimonfin.2013.04.004
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    Cited by:

    1. Volkov, Nikanor I. & Yuhn, Ky-hyang, 2016. "Oil price shocks and exchange rate movements," Global Finance Journal, Elsevier, vol. 31(C), pages 18-30.
    2. Mensi, Walid & Hammoudeh, Shawkat & Yoon, Seong-Min, 2015. "Structural breaks, dynamic correlations, asymmetric volatility transmission, and hedging strategies for petroleum prices and USD exchange rate," Energy Economics, Elsevier, vol. 48(C), pages 46-60.
    3. Cristina Amado & Annastiina Silvennoinen & Timo Ter¨asvirta, 2018. "Models with Multiplicative Decomposition of Conditional Variances and Correlations," NIPE Working Papers 07/2018, NIPE - Universidade do Minho.
    4. repec:eee:quaeco:v:65:y:2017:i:c:p:304-313 is not listed on IDEAS
    5. repec:eee:jimfin:v:74:y:2017:i:c:p:53-68 is not listed on IDEAS
    6. Da Fonseca, José & Ignatieva, Katja & Ziveyi, Jonathan, 2016. "Explaining credit default swap spreads by means of realized jumps and volatilities in the energy market," Energy Economics, Elsevier, vol. 56(C), pages 215-228.

    More about this item

    Keywords

    Oil price; US dollar; Price range; Dynamic copula; Asset-allocation strategy;

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting

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