Differentiating the Impact of Oil Price Shocks on Exchange Rate Volatility During Economic and Non-Economic Crises

Abstract

It is already common knowledge that the price of oil has a major impact on currency swings. As a result, we examine how changes in oil prices affect the development of exchange rates during an economic crisis. We expected that oil prices' propensity to amplify exchange rate volatility would vary between economic and non-economic crises driven by distinct factors. As a result, we subdivided the crisis sample into two groups: those affected by the Great Recession following the Global Financial Crisis (GFC) of 2007 and those affected by the Great Lockdown following the recent COVID-19 outbreaks. Using the GARCH model and its numerous extensions, we found three findings that strengthened our contributions to the empirical investigation of exchange rate volatility. To begin, we show that the extent to which economic and non-economic crises increase exchange rate volatility depends on their respective sources. Second, the continuous nature of exchange rate volatility during COVID-19 has been exacerbated by variations in global oil prices. Finally, investors may benefit from the evidence-based recommendations provided by our identification of distinct patterns of persistent (transient) exchange rate volatility across several samples of difficult periods, since it shows that investors need not generalize their portfolio selection strategy despite the presence of economic crises.