A study of the interactive relationship between oil price and exchange rate: A copula approach and a DCC-MGARCH model

Abstract

This paper examines the relationship between oil prices and the US dollar exchange rate using a copula approach and the DCC-MGARCH model. In order to identify a possible impact and interdependence between oil prices and exchange rates during the global financial crisis, we divided the study period into sub-periods, pre-crisis, crisis and post-crisis periods. We found that oil prices and exchange rates are independent during the pre-crisis period. However, evidence of this impact and a positive dependence between our variables were reported after the crisis onset. In addition, we found that oil prices influenced exchange rates and vice versa during the crisis period, but not during the pre-crisis period. These results have important implications on risk management and monetary policy to control inflationary pressures from oil prices and fiscal policy in oil-exporting countries.