TITLE:
Time Varying Dependance between Crude Oil, Natural Gas and OPEC and NON-OPEC Exchange Rate Using Wavelet Vine Copula
AUTHORS:
Angham Ben Brayek, Farea Al-Harbi
KEYWORDS:
Dependence, Exchange Rates, Crude Oil Price, Natural Gas, Wavelet Vine Copula
JOURNAL NAME:
Theoretical Economics Letters,
Vol.14 No.5,
October
31,
2024
ABSTRACT: In this paper, we explore the dynamic relationship between exchange rates, natural gas, and crude oil prices using the wavelet vine copula approach. The vine copula method offers the advantage of capturing key characteristics of changes in petroleum prices. We examine the out-of-sample hedging effectiveness of two popular vine copula models: canonical (C) and drawable (D) vine copulas. Vine copula modeling provides greater flexibility and allows for the modeling of complex dependency patterns in high-dimensional distributions. Analyzing daily return data for WTI, Brent, natural gas, and the SAR, KWD, MXN, and EUR exchange rates, we find evidence of asymmetric links between these variables. The empirical results indicate that the C-vine copula model is the most effective in detecting the dependence between different variables. Overall, our findings suggest that for long-term investors, the relatively strong co-movement over the long term reduces diversification benefits between these assets. In contrast, for short-term investors, investing in crude oil is a favorable option due to its low correlation with stock returns. However, investors should be cautious about the increased co-movement during crisis periods, as it indicates a higher risk of contagion.