Relationship between Exchange Rates, Palm Oil Prices, and Crude Oil Prices: A Vine Copula Based GARCH Approach

Abstract

The dollar is the leading international currency, and it is used widely in the majority of international financial transactions. The various food products that comprise agricultural commodities, as also crude oil, have been using the dollar exchange rate for international trade. Over the past several years, the changes in the dollar exchange rate have shown more volatility in addition to a depreciation trend, which has had an influence on the prices of those commodities. We analyzed the relationship between the dollar exchange rates and the prices of two commodities, palm oil and crude oil, by using the GARCH(1,1) model to examine the volatility of the exchange rates and the future prices 1-Pos. of the prices of both the commodities. The vine copula model is used to analyze the dependence structure between their marginal distributions. The data analyses were based on the daily observations from June 2007 to March 2013. The empirical results of GARCH(1,1) show that the exchange rates, palm oil prices, and crude oil prices have a long-run persistence in volatility. The C-vine copula model reveals that there exists a weak negative dependence for each pair-copula, that is, Exchange rate-Palm oil (E,P) and Exchange rate-Crude oil (E,C) in tree 1. Also, a conditional pair-copula of Palm oil-Crude oil given Exchange rate (P,C|E) in tree 2 offers a weak positive dependence. Moreover, the findings of this study provide evidence that the exchange rate (E) is an important variable that governs the interactions in the dependence structure between palm oil price (P) and crude oil price (C).KeywordsExchange RateCommodity PriceGaussian CopulaDollar Exchange RateCopula ParameterThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.