Modelling exchange rate volatility in turbulent periods: The role of oil prices in Nigeria

Abstract

The oil price has been increasingly identified as a key fundamental in the dynamics of exchange rates. As a result, we investigate how changes in oil prices affect the dynamics of exchange rates during crisis periods. We hypothesised that the potential of oil prices as an amplifier of exchange rate volatility during crises varies for economic and non-economic crises with divergent origins. Consequently, we classified the crisis sample into two sub-samples: the great recession caused by the 2007 global financial crisis (GFC) is defined as a crisis sample with an economic origin, while the great lockdown caused by the recent COVID-19 outbreaks defined our crisis period with a non-economic origin. We used the GARCH model and its many extensions and noted three findings that strengthened our contributions to the empirical analysis of exchange rate volatility. First, we show that the divergent origins of economic and non-economic crises matter in terms of the extent to which they heighten exchange rate volatility. Second, the persistence of exchange rate volatility during COVID-19 is exacerbated by changes in international oil prices. Finally, our finding of varying dynamics of persistent (transient) exchange rate volatility across different samples of turbulent periods provides investors with evidence-based insights not to generalise their portfolio selection strategy amidst economic crises of different origins.

Keywords

• C58
• F31
• G01