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Dependence Structure between Oil Prices, Exchange Rates, and Interest Rates

Jong-Min Kim and Hojin Jung

Year: 2018
Volume: Volume 39
Number: Number 2
DOI: 10.5547/01956574.39.2.jkim
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Abstract:
This article unveils the dependence structure between crude oil prices, exchange rates, and the United States interest rates. We begin by using asymmetric GARCH models to examine the marginal behavior of the returns, and then various copulas are used to understand extreme market co-movements. We also investigate the causal relationship and the spillover effects by using the Granger causality test and the BEKK representation of a multivariate GARCH process. Over the 1998-2017 period, we find evidence of an inverse relationship between the U.S. interest rates and the crude oil prices. Oil-exchange rate linkages become stronger for most of the oil dependent countries considered in this article in the aftermath of the global financial crisis. There is also asymmetric tail dependence for almost all of the oil-exchange rate pairs. The results of Granger causality tests mainly indicate that crude oil prices Granger cause exchange rates. We also find that there are unidirectional volatility spillovers from WTI to exchange rates for oil exporting countries and to the U.S. interest rates. These findings provide important implications for investors to hedge the possible risk with international portfolio diversification.



Interfuel Substitution: Evidence from the Markov Switching Minflex Laurent Demand System with BEKK Errors

Apostolos Serletis and Libo Xu

Year: 2019
Volume: Volume 40
Number: Number 6
DOI: 10.5547/01956574.40.6.aser
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Abstract:
We investigate interfuel substitution in the United States using the minflex Laurent demand system and a century of data (from 1919 to 2012). We relax the assumption of constant parameters in the demand system, and also relax the homoskedasticity assumption, instead assuming that the covariance matrix of the errors is time-varying. Our results are consistent with theoretical regularity and indicate that the Morishima elasticities of substitution are always positive for all pairs of the energy goods (suggesting substitutability), but exhibit large swings across two regimes, generally being higher in the high demand volatility regime before the 1950s.





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