Dynamic dependence and extreme risk comovement: The case of oil prices and exchange rates

This paper aims at investigating the dynamic dependence and extreme risk comovement of oil price and exchange rates in seven oil-importing and seven oil-exporting countries. For this purpose, we use six representative time- varying copula models and four types of tail dependences to assess the downside and upside conditional value-at-risk measures (CoVaRs). Our findings indicate that the dependence of crude oil returns and exchange rates is negative for most pairs, i.e., the rise (fall) in oil prices was accompanied by the appreciation (depreciation) of foreign currency against the US dollar. The oil price – exchange rate dependences in oil exporters are slightly larger than in oil importers, even though the dependence is weak in general. More interestingly, we find strong evidence of significant risk comovement between crude oil returns and exchange rates through the analysis of downside and upside CoVaRs. This comovement particularly showed asymmetric effects.