ASEAN-5 forex rates and crude oil: Markov regime-switching analysis. Issue 54 (20th November 2022)

• Record Type: Journal Article
• Authors: Aziz, Mukhriz Izraf Azman; Umar, Zaghum; Gubareva, Mariya; Sokolova, Tatiana; Vo, Xuan Vinh
• Is Part Of: Applied economics. Volume 54:Issue 54(2022)
• Page Start: 6234
• Page End: 6253
• Publication Date: 2022-11-20
• Subjects: Energy markets -- oil-market shocks -- exchange rate -- ASEAN-5 -- Markov-switching model; G1 -- F31 -- F33 -- F36 -- F45 -- E44 -- G15 -- Q43; Economics -- Periodicals; 330
• DOI: 10.1080/00036846.2022.2083066
• Languages: English
• ISSNs: 0003-6846

Abstract

ABSTRACT: We investigate the influence of moves in oil prices on exchange rates of Indonesia, Malaysia, the Philippines, Singapore and Thailand (the ASEAN-5 countries). We disentangle oil shocks, representing them by three components: demand shock, supply shock and risk shock, and examine their impact on the ASEAN-5 exchange rates by employing high-/low-volatility Markov regime-switching regressions for the period 2006 to Beckmann, Czudaj, and Arora 2020. We find that demand shocks make forex rates increase for net oil-producing as well as net oil-consuming economies. The impacts of supply shocks on forex rates for most economies are rather low. The risk shocks lead to depreciating effects on the ASEAN-5 currencies, supporting the notion that the open-oriented nature of ASEAN-5 economies makes them susceptible to constant fluctuations in the global oil market. Summary: We study interactions between the price of crude oil and exchange rates of the ASEAN-5 economies. We decompose changes in oil price into demand-, supply- and risk-driven components. We show non-linear interrelations between movements in forex rates and price of oil. Demand shocks appreciate forex rates for both net oil-producer and net oil-consumer economies. Supply-driven moves in oil prices exercise a marginal influence on forex rates for most countries. Risk shocks have depreciating effects on the ASEAN-5 exchange rates.