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

Lu Yang, Xiao Jing Cai, Shigeyuki Hamori

Research output: Contribution to journalArticle

11 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)140-152
Number of pages13
JournalNorth American Journal of Economics and Finance
Volume44
DOIs
Publication statusPublished - Apr 2018
Externally publishedYes

Keywords

  • DCC-MIDAS
  • Exchange rate
  • GARCH-MIDAS
  • Oil price

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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