Journal of Applied Finance & Banking

Relationship between Crude Oil Prices and the U.S. Dollar Exchange Rates: Constant or Time-varying?

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  • Abstract

    This paper aims to analyze the intertemporal interaction between crude oil prices and the U.S. dollar trade-weighted exchange rates from January 1997 through December 2012. To this end, the study assumes that the conditional covariance matrix between crude oil and the dollar exchange rate returns follows a bivariate GARCH process. Using daily data, I find strong evidence of a time-varying conditional covariance and correlation between crude oil prices and the U.S. dollar exchange rates. If on one day the change in the dollar price of oil is largely due to a change in the dollarís value, there is a tendency for the next dayís change in oil prices to be primarily caused by changes in the dollarís value as well. On the other hand, if one day the change in the dollar price of oil is caused primarily by factors other than the dollarís value, there is a tendency for those to be primarily causes of changes in the dollar price of oil on subsequent days.

    JEL classification numbers: E31, F31 
    Keywords: Garch process, crude oil prices, exchange rate