Oil Price Dynamics and Currency-Hedging Behavior: Out-of-sample Appendix

Agudze, Komla and Ibhagui, Oyakhilome (2020): Oil Price Dynamics and Currency-Hedging Behavior: Out-of-sample Appendix.

Abstract

In a recent paper, Agudze and Ibhagui (2019) showed that for Korea, a major crude oil importer, the dollar-won cross-currency basis tends to tighten when oil prices increase. They argued that this positive relation stems from importers’ increased propensity to currency-hedge, that is to buy the dollar forward, when oil prices are in a high regime. They estimated this high oil price regime to have a median lower bound of $55. Much below this bound, such as the sub $40 oil prices that are being observed in the market in recent times, they noted that this meant oil prices have transitioned to a low-price regime. Under this regime, they argued that the propensity for oil importers to currency-hedge becomes substantially diminished. As a result, the dollar-won basis no more bears a positive and significant relation with oil prices. Interestingly, under the low price regime, they found evidence that the relation turns negative, so that a rise in oil prices goes together with wider dollar-won basis rather than the tighter dollar-won basis documented under the high price regime.

• Item Type: MPRA Paper
• Language: English
• Keywords: Oil Price Dynamics, Currency-Hedging Behavior, Out-of-sample
• Subjects: F - International Economics > F0 - General

References

1. Agudze, K and Ibhagui, O (2020). Oil Price Dynamics and Currency-Hedging Behavior. Available at SSRN: http://dx.doi.org/10.2139/ssrn.3538870

2. Agudze, K., Ibhagui., O, and Thompson B. (2020). Revisiting the Comovement of Cross-Currency Basis and the Dollar: A Rolling Correlation Approach. The Journal of Investing, 29 (3) 89-107; DOI: https://doi.org/10.3905/joi.2020.1.123