Asymmetric impact of oil prices on exchange rate and stock prices

Abstract

We examine the causal relation between oil prices, exchange rate and stock prices in the Indian context using the Hiemstra and Jones (1994) nonlinear Granger causality and nonlinear ARDL tests. The results of Hiemstra and Jones (1994) causality show a strong evidence of bidirectional nonlinear relation between oil and exchange rate, and between oil and stock price. The results further reveal significant unidirectional nonlinear causality from exchange rate to stock prices. The results of the NARDL test reveal that previous month positive and negative shocks in oil prices have positive (negative) significant impact on exchange rate (stock prices). In both the cases, the positive previous month shock has more pronounced effect than the negative shocks, confirming the asymmetric impact of oil prices on exchange rates and stock prices. To account for the persistence in the variance of oil, exchange rate and stock prices, we consider residuals obtained from GARCH (1,1) filtered model and conclude that our findings are consistently robust.