Can oil prices predict the direction of exchange rate movements? An empirical and economic analysis for the case of India

This study investigates whether oil prices have enough predictive information to predict the direction of the movement of exchange rate by examining the type of cointegration relationship between exchange rate and oil prices in India between 1991Q1 and 2013Q1. Our findings suggest the existence of c...

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Published in:Economic Research-Ekonomska Istrazivanja
Main Author: Yiew T.-H.; Yip C.-Y.; Tan Y.-L.; Habibullah M.S.; Alih Khadijah C.
Format: Article
Language:English
Published: Taylor and Francis Ltd. 2019
Online Access:https://www.scopus.com/inward/record.uri?eid=2-s2.0-85065340020&doi=10.1080%2f1331677X.2018.1559746&partnerID=40&md5=2541d42466d52f23c36b4a5477464818
id 2-s2.0-85065340020
spelling 2-s2.0-85065340020
Yiew T.-H.; Yip C.-Y.; Tan Y.-L.; Habibullah M.S.; Alih Khadijah C.
Can oil prices predict the direction of exchange rate movements? An empirical and economic analysis for the case of India
2019
Economic Research-Ekonomska Istrazivanja
32
1
10.1080/1331677X.2018.1559746
https://www.scopus.com/inward/record.uri?eid=2-s2.0-85065340020&doi=10.1080%2f1331677X.2018.1559746&partnerID=40&md5=2541d42466d52f23c36b4a5477464818
This study investigates whether oil prices have enough predictive information to predict the direction of the movement of exchange rate by examining the type of cointegration relationship between exchange rate and oil prices in India between 1991Q1 and 2013Q1. Our findings suggest the existence of cointegration relationship between exchange rate and oil prices using both Engle–Granger two-step cointegration test and Johansen cointegration test. Using a momentum threshold autoregressive consistent model, we find evidence in favour of asymmetric cointegration between the two variables. Nevertheless we find no evidence to support asymmetric cointegration relationship between the two variables when threshold autoregressive, threshold autoregressive consistent, and momentum threshold autoregressive models are used. Thus, the results suggest that for certain time period, the adjustment process between exchange rate and oil price is constant, which makes it conducive for predicting the direction of exchange rate movement. However, evidence of asymmetric cointegration suggests that the stable relationship is likely to be interrupted with intervals of structural change implying correction in the dynamics of influencing factors. © 2019, © 2019 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group.
Taylor and Francis Ltd.
1331677X
English
Article
All Open Access; Hybrid Gold Open Access
author Yiew T.-H.; Yip C.-Y.; Tan Y.-L.; Habibullah M.S.; Alih Khadijah C.
spellingShingle Yiew T.-H.; Yip C.-Y.; Tan Y.-L.; Habibullah M.S.; Alih Khadijah C.
Can oil prices predict the direction of exchange rate movements? An empirical and economic analysis for the case of India
author_facet Yiew T.-H.; Yip C.-Y.; Tan Y.-L.; Habibullah M.S.; Alih Khadijah C.
author_sort Yiew T.-H.; Yip C.-Y.; Tan Y.-L.; Habibullah M.S.; Alih Khadijah C.
title Can oil prices predict the direction of exchange rate movements? An empirical and economic analysis for the case of India
title_short Can oil prices predict the direction of exchange rate movements? An empirical and economic analysis for the case of India
title_full Can oil prices predict the direction of exchange rate movements? An empirical and economic analysis for the case of India
title_fullStr Can oil prices predict the direction of exchange rate movements? An empirical and economic analysis for the case of India
title_full_unstemmed Can oil prices predict the direction of exchange rate movements? An empirical and economic analysis for the case of India
title_sort Can oil prices predict the direction of exchange rate movements? An empirical and economic analysis for the case of India
publishDate 2019
container_title Economic Research-Ekonomska Istrazivanja
container_volume 32
container_issue 1
doi_str_mv 10.1080/1331677X.2018.1559746
url https://www.scopus.com/inward/record.uri?eid=2-s2.0-85065340020&doi=10.1080%2f1331677X.2018.1559746&partnerID=40&md5=2541d42466d52f23c36b4a5477464818
description This study investigates whether oil prices have enough predictive information to predict the direction of the movement of exchange rate by examining the type of cointegration relationship between exchange rate and oil prices in India between 1991Q1 and 2013Q1. Our findings suggest the existence of cointegration relationship between exchange rate and oil prices using both Engle–Granger two-step cointegration test and Johansen cointegration test. Using a momentum threshold autoregressive consistent model, we find evidence in favour of asymmetric cointegration between the two variables. Nevertheless we find no evidence to support asymmetric cointegration relationship between the two variables when threshold autoregressive, threshold autoregressive consistent, and momentum threshold autoregressive models are used. Thus, the results suggest that for certain time period, the adjustment process between exchange rate and oil price is constant, which makes it conducive for predicting the direction of exchange rate movement. However, evidence of asymmetric cointegration suggests that the stable relationship is likely to be interrupted with intervals of structural change implying correction in the dynamics of influencing factors. © 2019, © 2019 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group.
publisher Taylor and Francis Ltd.
issn 1331677X
language English
format Article
accesstype All Open Access; Hybrid Gold Open Access
record_format scopus
collection Scopus
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