Uncovering the Dynamic Relationship Between Exchange Rates and Oil Price Volatility
Purpose: The primary aim of this study is to address a gap in existing literature by providing a comprehensive analysis of prior research and developing a structured literature review. This approach seeks to enhance understanding of the topic by offering a clear and contextualized perspective on the relationship between crude oil prices and exchange rates. Design/Methodology/Approach: Using daily data spanning from January 2020 to June 2023, this study investigates the interconnectedness between crude oil prices and exchange rates. As a first step, the impulse response function is employed to capture the dynamic interactions between the variables following a shock to either series. In the second step, a VAR-DCC-GARCH model is applied to analyze time-varying correlations and volatility dynamics between the two variables. Findings: The results indicate that shocks in crude oil prices have a direct and significant impact on exchange rate volatility. Furthermore, the VAR-DCC-GARCH analysis reveals a strong dependency of the Japanese yen, Mexican peso, Canadian dollar, and Indian rupee on oil price volatility. In contrast, the Russian ruble demonstrates relative resistance to fluctuations in crude oil prices. Practical Implications: The findings suggest that the dollarization of the global economy plays a significant role in shaping the relationship between foreign exchange markets and crude oil price volatility, with important implications for policymakers and international investors. Originality/Value: This study contributes to existing literature by combining impulse response analysis with a VAR-DCC-GARCH framework to provide a comprehensive and dynamic assessment of the relationship between oil prices and exchange rates across major economies.