Nonlinear causality between crude oil price and exchange rate: A comparative study of China and India

Bal, D P and Rath, Badri Narayan (2015) Nonlinear causality between crude oil price and exchange rate: A comparative study of China and India. Energy Economics, 51. pp. 149-156. ISSN 0140-9883

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Abstract

While several studies have examined the linear causal relationship between oil prices and exchange rates, little is known about the nonlinear causality between these two variables. The present paper tries to fill this research gap in the context of India and China. By applying the Hiemstra and Jones (1994) nonlinear Granger causality test to the VAR residuals, the study finds a significant bi-directional nonlinear Granger causality between oil prices and exchange rates in both countries. The findings suggest that the nonlinearity of oil price influences the exchange rate irrespective of the exchange rate regimes. Further, to check robustness, the persistence in the variance of oil price and exchange rate is taken into account using a GARCH (1, 1) model. While the results consistently hold in the case of India, with respect to China, a unidirectional causality runs from exchange rate to oil price. However, the oil price in China does not Granger cause exchange rate.

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IITH Creators:	IITH Creators ORCiD Rath, Badri Narayan http://orcid.org/0000-0001-7211-0952
Item Type:	Article
Uncontrolled Keywords:	Nonlinear causality; BDS test; Oil price; Exchange rate; Volatility persistence
Subjects:	Social sciences > Business Finance
Divisions:	Department of Liberal Arts
Depositing User:	Team Library
Date Deposited:	30 Jul 2015 11:33
Last Modified:	11 Sep 2017 06:56
URI:	http://raiithold.iith.ac.in/id/eprint/1725
Publisher URL:	https://doi.org/10.1016/j.eneco.2015.06.013
OA policy:	http://www.sherpa.ac.uk/romeo/issn/0140-9883/
Related URLs:	Google Scholar

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