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Economic research - Ekonomska istraživanja, Vol. 32 No. 1, 2019.

Original scientific paper

https://doi.org/10.1080/1331677X.2018.1559746

Can oil prices predict the direction of exchange rate movements? An empirical and economic analysis for the case of India

Thian-Hee Yiew ; Faculty of Business and Finance, Universiti Tunku Abdul Rahman, Malaysia
Chee-Yin Yip ; Faculty of Business and Finance, Universiti Tunku Abdul Rahman, Malaysia
Yan-Ling Tan ; Faculty of Business and Management, Universiti Teknologi MARA Johor Branch, Segamat Campus, Malaysia
Muzafar Shah Habibullah ; Faculty of Economics and Management, Universiti Putra Malaysia, Malaysia
C Alih Khadijah ; Faculty of Economics and Management, Universiti Putra Malaysia, Malaysia

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Abstract

This study investigates whether oil prices have enough predictive information to predict the direction of the movement of exchange rate by examining the type of cointegration relationship between exchange rate and oil prices in India between 1991Q1 and 2013Q1. Our findings suggest the existence of cointegration relationship between exchange rate and oil prices using both Engle–Granger two-step cointegration test and Johansen cointegration test. Using a momentum threshold autoregressive consistent model, we find evidence in favour of asymmetric cointegration between the two variables. Nevertheless we find no evidence to support asymmetric cointegration relationship between the two variables when threshold autoregressive, threshold autoregressive consistent, and momentum threshold autoregressive models are used. Thus, the results suggest that for certain time period, the adjustment process between exchange rate and oil price is constant, which makes it conducive for predicting the direction of exchange rate movement. However, evidence of asymmetric cointegration suggests that the stable relationship is likely to be interrupted with intervals of structural change implying correction in the dynamics of influencing factors

Keywords

Asymmetric cointegration; exchange rate; oil prices; India

Hrčak ID:

228617

URI

https://hrcak.srce.hr/228617

Publication date:

22.1.2019.

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