The impact of oil and natural gas prices on overnight risk in exchange rates based on the MVMQ-CAViaR models

Abstract

Existing research has not yet studied the impact of oil and gas prices on the overnight risk in exchange rates. This paper examines the impact of oil and natural gas prices on the overnight risk in the RMB, HKD, and Yen. An MVMQ-CAViaR model of multiple markets and an MVMQ-CAViaR model of combined influence are proposed to measure the impact of oil and natural gas prices on the overnight risk in the Yen, HKD, and RMB from 2013 to 2019. The empirical results show that the overnight risk in the RMB, HKD, and Yen are impacted by lagged risk and that the RMB suffer from the largest risks. The three exchange rates' overnight risks are impacted by the risk in oil prices and natural gas prices. However, the Yen suffers from the largest risk, and the HKD suffers from the smallest risk. This shows the fragility of Japan's energy sector and its extreme dependence on energy imports. This shows that the energy sector has little impact on the Hong Kong economy, which is dominated by finance and trading. The two industries of trading and finance do not require much energy. The impact of natural gas price risks on the overnight risk in the RMB, HKD, and Yen is smaller than that of oil price risks. All overnight risks are affected by the combined influence of oil prices and natural gas prices. The Yen exchange rate suffers from the greatest influence relative to the HKD exchange rate and RMB exchange rate. Thus, when oil prices and natural gas prices fall at the same time, more attention should be paid to the effect of their combined influence on national exchange rates. Financial regulators need to be ready for exchange rate fluctuations. The MVMQ-CAViaR model of combined influence is more accurate than the MVMQ-CAViaR model of multiple markets, especially at the 1% significance level and for HKD, and the MVMQ-CAViaR model of combined influence produces better estimates.