The Impact of Oil Price and Oil Volatility Index (OVX) on the Exchange Rate in Sub-Saharan Africa: Evidence from Oil Importing/Exporting Countries

Abstract

The Theory demonstrates that oil price and oil volatility (OVX) are significant determinants of economic activity; however, studies seldom consider both variables in the oil–exchange rate nexus and ignore the distributional heterogeneity of the exchange rate. We investigate their joint effect and employ both the quantile regression and Markov switching models to address this. We differentiate between positive/negative shocks and control for the effect of the global financial crisis in 2008 and the COVID-19 pandemic in 2020. We observe that OVX shocks significantly impact the exchange rate for all countries whereas, oil price shocks only affect the exchange rate of oil importing countries. Rising (falling) OVX causes the local currency to depreciate (appreciate). The impact of rising or falling OVX is the same for oil importing and oil exporting countries whereas the impact of rising and falling oil price varies. The impact of oil price and OVX on exchange rate is affected by market conditions. The exchange rate responds to oil price and OVX mostly at lower quantiles (bearish markets) for all countries, which reveals investors sensitivity. In contrast, a weak to no significant response is observed at the higher quantiles (bullish market). Our results are robust in model selection (Markov switching models).

The effect of oil price shocks on stock market performance in selected African countries

“…We use aggregate supply and demand theory as the basis for our model that examines the effects of oil price shocks on the biggest and smallest African stock markets. Korley and Giouvris (2022) and El‐Husseiny et al (2019) clearly outlined the linear connection we adopted:…”

“…We use aggregate supply and demand theory as the basis for our model that examines the effects of oil price shocks on the biggest and smallest African stock markets. Korley and Giouvris (2022) and El-Husseiny et al ( 2019) clearly outlined the linear connection we adopted: Objective 1: Any effect of oil price shocks on the performance of chosen African oil-exporting countries in terms of their stock markets.…”

Analysis of Crude Oil Market Volatility and Macroeconomic Conditions: Empirical Evidence from Nigeria

“…Maud and Evangelos [15] conducted research on oil price volatility from 1990 to 2021. The data were analyzed using the ARDL model.…”

Does Economic Policy Uncertainty Explain Exchange Rate Movements in the Economic Community of West African States (ECOWAS): A Panel ARDL Approach

“…Other studies have also addressed the response of exchange rates on the basis of uncertainty; however, they did not consider uncertainty in this regard. The uncertainty component in these studies was captured by volatility measures such as GARCH (Salisu and Mobolaji 2013), while others simply relied on Volatility index (VIX) and/or the OVX (Lu et al 2017;Korley and Giouvris 2022). The foreign economic policy uncertainty index is retrieved from (https//www.policyuncertainty.com (accessed on 1 February 2021)).…”