Analyzing the (a)symmetric impacts of oil price, economic policy uncertainty, and global geopolitical risk on exchange rate

Abstract

Recently, the association between oil price and exchange rate has attracted a new track in which empirical studies examine the probability of asymmetric respond of exchange rate to oil price fluctuations. We contribute to this literature by taking into account two uncertainty measures as additional variables. We argue in this paper that oil price and uncertainty measures (Economic Policy Uncertainty index and global Geopolitical Risk index) might have asymmetric impacts on exchange rate volatility. We apply the non-linear autoregressive distributed lags model (NARDL), to examine the asymmetry for five monthly US dollar based exchange rates of Canada, China, Japan, Republic of Korea, and UK. The non-linear ARDL findings reveal evidence for long- and short-run asymmetric impacts for some currencies, and symmetric impact for other currencies. The findings may be helpful guidance for central banks when designing policies to intervene in the exchange rate market.