Oil shocks and currency behavior: A dual approach to digital and traditional currencies

Abstract

Given the financial markets' growing preference for examining digital platforms, this study explores the dynamic relationship of oil shocks with both conventional and digital currencies. It provides a novel approach for evaluating the relationship between aggregate oil, demand, and supply shocks using three conventional currencies (Japanese Yen, Chinese Yuan, and Euro), cryptocurrencies (Bitcoin, Ethereum, Tether), and DeFi tokens (Maker, Chainlink, and Basic Attention Token). We use wavelet analysis to test the asymmetric association among variables from June 22, 2018, to July 11, 2023. The outcomes of continuous wavelet confirm the volatile behavior of oil shocks and studied currencies. In particular, a nonlinear wavelet coherence is observed between oil shocks and DeFi tokens, cryptocurrencies, and traditional currency in the short, medium, and long term. Moreover, crypto and conventional currencies are found to respond more strongly to external events than DeFi tokens. Given the empirical findings and the rapid transformation of digitalized finance with ongoing currency restructuring, this study plays a critical role by actively influencing the adaptation of regulatory frameworks to align with dynamic changes in associations, serving as a strategic guide for regulatory bodies to navigate the complexities of emerging financial paradigms.