On the connection between oil and global foreign exchange markets: The role of economic policy uncertainty

This paper examines the effect of U.S. economic policy uncertainty on the connectedness across oil and the most globally traded currency pairs. First, we examine volatility spillover among oil and the exchange rates, and find strong connection between crude oil and currency markets with oil being ne...

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Bibliographic Details
Published in:Resources policy 2021-08, Vol.72, p.102110, Article 102110
Main Authors: Fasanya, Ismail O., Adekoya, Oluwasegun B., Adetokunbo, Abiodun M.
Format: Article
Language:English
Subjects:
Assets
Capital
Capital movement
Causality
Currency
Economic policy
Economic policy uncertainty
Economics
Foreign exchange markets
Foreign exchange rates
International finance
Markets
Nonparametric quantile causality
Oil-exchange rates nexus
Petroleum
Prices
Pricing
Quantiles
Spillover effect
Uncertainty
Volatility
Volatility spillover
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Summary:This paper examines the effect of U.S. economic policy uncertainty on the connectedness across oil and the most globally traded currency pairs. First, we examine volatility spillover among oil and the exchange rates, and find strong connection between crude oil and currency markets with oil being net receivers of shocks. Second, BDS test shows that nonlinearity is very important when examining the role of EPU in affecting the interactions between oil and exchange rate markets. Third, the nonparametric quantiles-based causality test shows that the spillover for each asset is driven by economic policy uncertainty around the lower and median quantiles. This finally suggests that the role of the U.S. economic policy in influencing global financial cycle which consequently leads to capital flows and movements in the prices of assets across financial markets cannot be overemphasized. Relevant policy implications can be drawn from these findings. •We examine the effect of U.S. EPU on the connectedness of crude oil and global foreign exchange pairs.•Spillover and Nonparametric Causality-in-Quantiles Approaches are employed.•We observe strong connection between crude oil and currency markets.•EPU affects the interactions between the markets in a non-linear fashion.•The connection between the markets and EPU is stronger around the lower and middle quantiles.
ISSN:0301-4207
1873-7641
DOI:10.1016/j.resourpol.2021.102110