The dynamic moderating function of the exchange rate market on the oil-stock nexus

Abstract

Oil price movements have an important impact on the stock market, and this impact could be dynamically moderated by the exchange rate, which could not be effectively depicted by VAR or GARCH methods widely used in previous studies. This paper adopts a more flexible nonlinear model to investigates this dynamic moderating effect of the exchange rate market on the oil-stock nexus for 45 major countries from November 30, 2005 to November 22, 2019. We also compare the differences in this moderating effect between oil-importing and oil-exporting countries and confirm the presence of a wealth transfer effect. Specifically, the empirical results show that (1) In the stage where domestic currency depreciation or appreciation degree is not serious (the growth rate is less than 0.1), an increase in crude oil prices has a positive impact on stock market returns, and this positive impact is weakened when the growth rate of the exchange rate return approaches zero. (2) As the local currency continues to appreciate (the growth rate is greater than about 0.22), the increase in crude oil prices may negatively influence stock market returns to an increasingly greater extent among crude oil importers. (3) The increase in crude oil prices may have a short-term positive impact on stock market returns in oil-exporting countries due to the wealth transfer effect when the domestic currency appreciates at a faster rate. Finally, we discuss the policy implications of our findings to help investors avoid risks due to fluctuations in international oil prices.