What determines the long-term correlation between oil prices and exchange rates? |
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| Institution: | 1. School of Finance, Zhongnan University of Economics and Law, 182# Nanhu Avenue, East Lake High-tech Development Zone, Wuhan 430-073, PR China;2. Graduate School of Economics, Kobe University, 2-1 Rokkodai, Nada-Ku, Kobe 657-8501, Japan;3. Faculty of Economics, Kobe University, 2-1, Rokkodai, Nada-Ku, Kobe 657-8501, Japan;1. University of Sousse, Sousse, Tunisia;2. LEO (CNRS UMR 7322), University of Orléans, Orléans, France;3. IPAG Business School, Paris, France;1. Northern Border University, College of Business Administration, Arar, 91431, P.O. Box 1321, Saudi Arabia;2. University of Gabès, Institut Supérieur de Gestion de Gabès, Gabès, 6002, Tunisia;1. Navarra Center for International Development, ICS, Universidad de Navarra, Pamplona, Spain;2. School of Economics and Business Administration, Universidad de Navarra, Pamplona, Spain |
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| 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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| Keywords: | Oil price Exchange rate GARCH-MIDAS DCC-MIDAS |
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