Abstract
We explore the dynamic and directional network connectedness between implied volatility measures of crude oil and the exchange rate of nine major currency pairs for a sample period from May 2007 to December 2016. We use the dynamic Cholesky-factor vector autoregression variance decomposition method. To ascertain the net directional spillovers and to determine the direction of the transmission of shocks, we employed the network graph connectedness method across a few select events characterized by the crude oil price volatility of 2008–09 and 2014–16. We found that the crude oil market has a dominant impact on the total connectedness of the crude oil currency-implied volatility relationship, suggesting that crude oil affects currencies more than currencies affect crude oil for the time frame of 2007–16. However, during the crude oil crisis periods, the dynamics are reversed, with crude having more of an effect. Additionally, the pairwise directional network connectedness between the currency pairs reveals that EURUSD is more sensitive to the crude price fluctuation than other major currency pairs and is one major currency that passes idiosyncratic shocks to other currency pairs.
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