Foreign exchange market and crude oil market-volatility spillover analysis

The reality that governs financial markets in recent times is that fluctuations in one market could rub off the volatility of another market either by moving in the same direction as the mirrored market moving in the opposite direction. Hence, researchers have often proposed that volatility transmission be considered in volatility studies in financial markets. This study sought to determine the rates of volatility spillover and shocks between oil prices and exchange rates in oil production. Data for the study were measured quarterly. The quantile regression and asymmetric GARCH estimations formed analytical tools for the study in addition to regular descriptive, unit root and cointegration tests. We find that increased spillover syndrome in the crude oil market in past periods resulted in inverse adjustments of present volatility in crude oil markets with a magnitude of 0.1339. Whereas the spillover effect from the currency market to the oil market is weaker than its effect from the oil market to the currency market is, significant incidences of asymmetric volatility are found. The significant and inverse spillover of volatility from the currency market to the crude oil market reveals that oil-producing countries utilize the crude oil market as safe-haven securities, particularly during periods plagued with economic uncertainty. Leverage effects were significantly present in the oil-exporting countries researched. The presence of leverage effects is a reflection of the heightened sensitivity of the currencies of oil-producing countries to negative shocks, particularly those related to fluctuations in oil prices. These effects can result in increased exchange rate volatility and have implications for economic stability, policy formulation, and the need for diversification efforts. Managing exchange rate volatility and stabilizing oil prices in oil exporting jurisdictions requires a combination of sound economic policies, coordinated policy responses, effective risk management, and strategies to reduce dependency on oil exports.