Oil Prices, Exchange Rates and Asset Prices

41 Pages Posted: 24 May 2013

See all articles by Marcel Fratzscher

Marcel Fratzscher

DIW Berlin; Centre for Economic Policy Research (CEPR)

Daniel Schneider

Goethe University Frankfurt

Ine Van Robays

European Central Bank

Multiple version iconThere are 3 versions of this paper

Date Written: May 1, 2013

Abstract

This paper takes a financial market perspective in examining the relationship between oil prices, the US dollar and asset prices, and it exploits the heteroskedasticity for the identification of causality in a multifactor model. It finds a bidirectional causality between the US dollar and oil prices since the early 2000s. Moreover, both oil prices and the US dollar are significantly affected by changes in equity market returns and risk. By contrast, oil prices did not react to changes in these financial assets before 2001. The paper provides evidence that this may be explained by the increased use of oil as a financial asset over the past decade, which intensified the link between oil and other assets. The model can account well for the strong and rising negative correlation between oil prices and the US dollar since the early 2000s, with risk shocks and the financialisation process of oil prices explaining most of the strengthening of this correlation.

Keywords: oil prices, asset prices, exchange rates, US dollar, identification, time-varying correlation

JEL Classification: F30, G15

Suggested Citation

Fratzscher, Marcel and Schneider, Daniel and Van Robays, Ine, Oil Prices, Exchange Rates and Asset Prices (May 1, 2013). DIW Berlin Discussion Paper No. 1302. Available at SSRN: https://ssrn.com/abstract=2269027 or http://dx.doi.org/10.2139/ssrn.2269027

Marcel Fratzscher

DIW Berlin ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Daniel Schneider

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Ine Van Robays (Contact Author)

European Central Bank ( email )

Kaiserstrasse 29
Frankfurt am Main, 60311
Germany
+496913446179 (Phone)

HOME PAGE: http://https://sites.google.com/site/inevanrobays/

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