Exchange rates, oil prices and world stock returns

Abstract

This paper examines responses of 14 major currency/USD pairs to two global factors (oil and world equity returns) from January 1999 to July 2017, a period comprising the global financial crisis and oil price boom and collapse. With global equity markets advancing, risk tolerance increases and oil and stock markets impact currencies under two methodologies: transmission of shocks and mean-variance approaches. Vector autoregressions (VARs) suggest large and statistically significant responses: commodity currencies strongly appreciate following positive oil price shocks and depreciate with positive global equity shocks. GARCH models provide similar qualitative results with coefficients typically larger for global equity returns than for oil returns. Emerging market currencies and subsamples for the crisis period are also discussed.