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Estimating volatility transmission between oil prices and the US Dollar exchange rate under structural breaks

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  • Hassan Anjum

    (Texas Tech University)

Abstract

This study examines volatility dynamics of oil prices and the US dollar exchange rate using univariate and bivariate GARCH models using data from January 2, 2000 to December 31, 2015. The modified iterative cumulative sum of square (ICSS) algorithm is employed to identify structural breaks in the variance of the two return series. I find no evidence of volatility transmission between oil prices and the US dollar exchange rate if structural breaks are ignored in the model. However, after accounting for structural breaks in variance in the bivariate GARCH model, I find significant volatility transmission between oil prices and the US dollar exchange rate. I also show that dynamic risk minimizing hedge ratios substantially change when breaks are incorporated in the bivariate GARCH model.

Suggested Citation

  • Hassan Anjum, 2019. "Estimating volatility transmission between oil prices and the US Dollar exchange rate under structural breaks," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 43(4), pages 750-763, October.
    • Handle: RePEc:spr:jecfin:v:43:y:2019:i:4:d:10.1007_s12197-019-09472-w
    DOI: 10.1007/s12197-019-09472-w
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    More about this item

    Keywords

    Volatility transmission; Oil volatility; Exchange rate volatility; Structural breaks; GARCH;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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