Hidden causality between oil prices and exchange rates

This work investigates the interactions between oil prices and exchange rates of 6 typical oil importers (China, Japan, and India) and exporters (Canada, Russia, and Saudi Arabia) from 2006 to 2022. We employ a novel method to capture their causal interactions, namely pattern causality, and compare the results to that based on the volatility spillover method. The empirical analysis supports most existing findings that oil prices are bidirectional correlated with exchange rates. However, unlike previous studies that only investigate positive and negative causalities, we highlight dark causality as a more complex interaction. Moreover, dark causality suggests that successive increases (decreases) in oil prices tend to drive the exchange rates of oil exporters to act in an oscillatory manner rather than in a purely positive or opposite trend, and vice versa. Furthermore, we also reveal that dark causality shows dominance during crises, e.g., the global financial crisis, the European debt crisis, the epidemic of COVID-19, and the Russia-Ukraine conflict. Revealing three types of causalities between oil prices and exchange rates helps policymakers develop more diversified macroeconomic policies. Moreover, the newly identified dark causality can be a useful indicator for investors to risk management. © 2023

Modelling the quantile cross-coherence between exchange rates: Does the COVID-19 pandemic change the interlinkage structure?

This paper examined the presence of daily returns coherence and spillover between 30 forex markets over the complete sample and crisis sub-periods. We mainly employed the quantile cross-spectral approach of Barunik and Kley (2019) to measure returns coherence among different investment horizons, while returns spillover is examined using the network connectedness approach. During the COVID-19 period, we found evidence supporting the interdependence hypothesis as opposed to the segregation model. This turns out to be significantly more accurate in the long-run horizon period under the 95%;95% return arrangement. In contrast, the global financial crisis is found to bring more diversification benefits for investors under the same arrangement. Furthermore, the results from ESDC-based analysis revealed some similarities with that from COVID-19 due to the absence of clearly significant negative interlinkages between the pairs in the sample. Lastly, the additional network connectedness analysis made the European (Belgian franc) FX market the primary receiver of shocks during the period of COVID-19 (European and financial). Our results carry significant implications for investors and policymakers concerning timely portfolio rebalancing and performing more organized monetary policies, respectively.