Volatility Spillover Effect from Energy Markets to Foreign Exchange Markets: The Case of Central and Eastern European and Eurasian Countries

This paper investigates the nonlinear risk transmission from the oil and natural gas markets to the foreign exchange markets of five energy importers and one major energy exporter. We separate conditional volatility into the transitory (short-term) and permanent (long-term) parts, and then these volatilities are embedded in an elaborate robust linear quantile regression model. We find that the risk spillover effect is relatively low in Central and Eastern European countries (CEECs) probably because they pursue a managed float exchange rate regime. On the other hand, this effect is higher for Turkey and Russia, which is especially true for the effect from oil to the rouble at the highest quantile. This happens because Russia receives the largest amount of foreign currency from oil exports. The results indicate that the short-term risk spillover effect is notably stronger than the long-term one, which means that the exchange rate volatility is mainly determined by market sentiment. The rolling regression results coincide very well with the estimated quantile parameters.