Revealing the nexus between oil and exchange rate in the major emerging markets—The timescale analysis

• DOI: http://doi.org/10.1002/ijfe.1686
• Author: Dejan Živkov,Suzana Balaban,Jovan Njegić
• Date: 01 April 2019
• Published date: 01 April 2019

RESEARCH ARTICLE

Revealing the nexus between oil and exchange rate in the

major emerging markets—The timescale analysis

Dejan Živkov

1

| Jovan Njegić

1

| Suzana Balaban

2

1

Novi Sad School of Business, University

of Novi Sad, Novi Sad, Serbia

2

Faculty of Economics in Subotica,

University of Novi Sad, Subotica, Serbia

Correspondence

Dejan Živkov, Novi Sad School of

Business, University of Novi Sad,

Vladimira Perića Valtera 4, Novi Sad 2100,

Serbia.

Email: dejanzivkov@gmail.com

JEL Classification: C63; F31; Q43

Abstract

This paper investigates the interrelationship between Brent oil price and

exchange rate in 10 emerging markets of East Europe, Asia, Africa, and South

America. For computational purpose, we apply two innovative methodologies

—wavelet coherence and phase difference that are capable of observing differ-

ent frequency scales. Wavelet coherence results suggest that strong coherence

is present during world financial crisis (WFC) in the oil‐exporting countries

and in majority of the oil‐importing countries. Phase arrows as well as phase

difference suggest negative coherence between oil and exchange rates in the

oil‐importing countries during WFC. Negative coherence is found in these

countries because currency depreciation was accompanied by immense oil

price drop in WFC period. In addition, phase difference has relatively stable

in‐phase dynamics in long term in the oil‐importing countries during tranquil

periods, which confirms theoretical stance that higher oil prices cause currency

depreciation and vice versa. As for the oil‐exporting countries, we find constant

and relatively long‐lasting anti‐phase pattern in Russian and Nigerian cases for

long‐term horizons but not for Brazilian one.

KEYWORDS

Emerging markets,exchange rate, oil, phase difference, wavelet coherence

1|INTRODUCTION

The extreme oil price swings in the last decade have been

instigated by the changing global oil demand and supply,

increased commodity financialization, global financial

crises, and the behaviour of speculators (see Bein &

Aga, 2016; Derviz, 2011; Mirović,Živkov, & Njegić,

2017; Novotny, 2012; Rafiq, 2011; Shamsollah & Maryam,

2011; Yildirim, Ozcelebi, & Ozkan, 2015; Zhang, Fan,

Tsai, & Wei, 2008; Živkov, Njegić, & Momčilović, 2018).

The oil price is one of the most important determinants

for national economic performance, thus proper under-

standing of the interdependencies between crude oil and

foreign exchange markets stands as a key interest for var-

ious market participants such as investors, arbitragers,

currency traders, policymakers, risk managers, and so

forth. The interconnection between oil and national

exchange rate is intertwined, whereby oil prices affect

both oil‐importing and oil‐exporting countries but in dif-

ferent ways. An increase in the oil price raises the cost of

domestic production in the oil‐importing countries,

aggravates the competitiveness of domestic goods, and

worsens current account, which eventually leads to

exchange rate depreciation. For oil‐exporting countries,

the reverse scenario is valid, because raising oil revenues,

due to increased oil price, provide a significant supply of

foreign currency in domestic system, which eventually

influences domestic currency to appreciate. Oil‐exporting

emerging markets are especially vulnerable when oil

prices have tendency to fall, because oil is a key source

Received: 19 December 2017 Revised: 4 July 2018 Accepted: 9 September 2018

DOI: 10.1002/ijfe.1686

Int J Fin Econ. 2019;24:685–697. © 2018 John Wiley & Sons, Ltd.wileyonlinelibrary.com/journal/ijfe 685