Volatility spillover effect between oil prices and foreign exchange markets

Abstract

This research examines empirically volatility spillover effect of oil prices on exchange rate. We are specifically concerned with the comparison of the relative magnitude of the oil shock on the exchange rate volatilities of 5 major oil importers (Pakistan, India, China, Japan, and Germany) and 5 major oil exporters (UAE, Canada, Iraq, Russia, and Saudi Arabia). By applying Diebold & Yilmaz (2012) methodology, the results suggested that oil prices show more contribution “from” other countries while it has less contribution “to” other countries. The examination of oil importers and exporters’ exchange rates depicted that oil prices have more volatility spillover effect on oil exporting countries as compared to oil importing countries. The outcomes are valuable for practitioners, such as traders, investors, as well as policy makers to enhance their understanding about interconnectedness of financial markets.