Short - and long-run relationship between oil price and exchange rate: evidence from Malaysia based on Markov regime switching approach

Hoe, Foong Chee and Masih, Mansur (2017): Short - and long-run relationship between oil price and exchange rate: evidence from Malaysia based on Markov regime switching approach.

Abstract

There has been an increase in irregularities in fluctuation of oil price globally with high unpredictability that have badly hit oil-producing countries including Malaysia as well as oil and gas companies that remains unresolved. We attempt to examine the short-and long run relationship between crude oil price and exchange rate using a combination of vector auto regression and Markov regime switching techniques. Malaysia is used as a case study. The findings tend to indicate that there is a short run impact on exchange rate when price of oil fluctuates, whereby oil price fluctuation has negative impact on MYR and it takes a long time for the impact to taper off. It is recommended that policy makers, investors and oil companies to take note of the impact on MYR with peaks in the 4th month after oil price changes and prepare accordingly using the right tools to manage and minimise risk of the impact.

• Item Type: MPRA Paper
• Language: English
• Keywords: oil price, exchange rate, Markov regime switching, Malaysia
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

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