Total, Asymmetric and Frequency Connectedness between Oil and Forex Markets

38 Pages Posted: 30 Jul 2019

See all articles by Jozef Baruník

Jozef Baruník

Charles University in Prague - Department of Economics; Institute of Information Theory and Automation, Prague

Evžen Kočenda

Charles University in Prague - Institute of Economic Studies; Institute of Information Theory and Automation (Czech Academy of Sciences) - Department of Econometrics; CESifo; University of Regensburg - Institute for East and Southeast European Studies; University of Michigan at Ann Arbor - The William Davidson Institute

Date Written: 2019

Abstract

We analyze total, asymmetric and frequency connectedness between oil and forex markets using high-frequency, intra-day data over the period 2007 - 2017. By employing variance decompositions and their spectral representation in combination with realized semivariances to account for asymmetric and frequency connectedness, we obtain interesting results. We show that divergence in monetary policy regimes affects forex volatility spillovers but that adding oil to a forex portfolio decreases the total connectedness of the mixed portfolio. Asymmetries in connectedness are relatively small. While negative shocks dominate forex volatility connectedness, positive shocks prevail when oil and forex markets are assessed jointly. Frequency connectedness is largely driven by uncertainty shocks and to a lesser extent by liquidity shocks, which impact long-term connectedness the most and lead to its dramatic increase during periods of distress.

Keywords: crude oil, forex market, volatility, connectedness, spillovers, semivariance, asymmetric effects, frequency connectedness

JEL Classification: C180, C580, F310, G150, O130, Q310, Q430

Suggested Citation

Barunik, Jozef and Kocenda, Evzen, Total, Asymmetric and Frequency Connectedness between Oil and Forex Markets (2019). CESifo Working Paper No. 7756, Available at SSRN: https://ssrn.com/abstract=3428828

Jozef Barunik (Contact Author)

Charles University in Prague - Department of Economics ( email )

Opletalova 26
Prague 1, 110 00
Czech Republic

HOME PAGE: http://ies.fsv.cuni.cz/en/staff/barunik

Institute of Information Theory and Automation, Prague ( email )

Pod vodarenskou vezi 4
CZ-18208 Praha 8
Czech Republic

HOME PAGE: http://staff.utia.cas.cz/barunik/home.htm

Evzen Kocenda

Charles University in Prague - Institute of Economic Studies ( email )

Opletalova St. 26
Prague, 11000
Czech Republic

HOME PAGE: http://kocenda.fsv.cuni.cz

Institute of Information Theory and Automation (Czech Academy of Sciences) - Department of Econometrics ( email )

Pod vodarenskou vezi 4
CZ-18208 Praha 8
Czech Republic

CESifo

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University of Regensburg - Institute for East and Southeast European Studies

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Regensburg, 93047
Germany

University of Michigan at Ann Arbor - The William Davidson Institute

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Ann Arbor, MI 48109-1234
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