Asymmetry and Uncertainty Across Energy and FX Markets

Abstract

Employing a time-varying volatility transmission model, this study examines the impact of asymmetric information and uncertainty on the interactions across energy and foreign exchange markets. The results show that the ARCH coefficients monitoring the impact for the "own" shocks (currency on currency and energy on energy) are in almost all cases statistically significant and positive as expected, for the models with Natural Gas and with WTI Oil, irrespectively of the currency considered. There is strong evidence of asymmetry when focusing on the Oil-based models; in the meantime, the asymmetry has a lower impact for Natural Gas. Concerning the uncertainty-related variables, there is much stronger evidence of significant impacts on volatility, as opposed to what observed in the mean dynamic. For WTI Oil, almost all uncertainty measures lead to an increase in the conditional variance (this holds true for both changes and levels). Significant coefficients are commonly found also for currencies independently of the presence of energy commodities in the bivariate model. Finally, for natural gas, the striking result is related to the limited relevance of uncertainty measures, showing very few cases of significant coefficients.

Keywords: Asymmetry, Interdependence, Uncertainty, Business cycle, Energy, FX

JEL Classification: G11, G15, C51, C52, C22, C32