Preprint Article Version 1 Preserved in Portico This version is not peer-reviewed

Why the Correlation Between Oil Prices and US Dollar Exchange Rate Is Time-varying?----Explanations Based on Role of Key Mediators

Version 1 : Received: 26 January 2018 / Approved: 31 January 2018 / Online: 31 January 2018 (15:52:35 CET)

A peer-reviewed article of this Preprint also exists.

Liao, J.; Shi, Y.; Xu, X. Why Is the Correlation between Crude Oil Prices and the US Dollar Exchange Rate Time-Varying?—Explanations Based on the Role of Key Mediators. Int. J. Financial Stud. 2018, 6, 61. Liao, J.; Shi, Y.; Xu, X. Why Is the Correlation between Crude Oil Prices and the US Dollar Exchange Rate Time-Varying?—Explanations Based on the Role of Key Mediators. Int. J. Financial Stud. 2018, 6, 61.

Abstract

Using DCC-GARCH and EGARCH model, this paper finds that since 1990, the relationship between crude oil prices and the US dollar index is time-varying, demonstrating a process of “very weak correlation—negative correlation—enhanced negative correlation—weakening negative correlation”, but the existing research does not provide enough reasonable explanation. Therefore, this paper proposed a “key mediating factors” hypothesis which points out that whether there is a common “key mediating factor” is important source of the time-varying relationship between two assets. We argue that market trend and financial market sentiment undertook the role of “key mediating factor” during the period of “2002 to the financial crisis” and “financial crisis to 2013”, while other periods lack the “key mediating factors”.

Keywords

crude oil price; dollar index; time-varying; key mediating factor

Subject

Business, Economics and Management, Finance

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