Modelling systemic risk and dependence structure between the prices of crude oil and exchange rates in BRICS economies: Evidence using quantile coherency and NGCoVaR approaches

Abstract

In this study, we examine the dependence structure and systemic risk between return series of the prices of crude oil and the BRICS exchange rates to US using the quantile coherency methods of Baruník and Kley (2015) and the nonparametric conditional value-at-risk granger causality test (hereafter NGCoVaR) of Diks and Wolski (2018) over the period 2005–2017. Further, we use the Hiemstra and Jones (1994, hereafter HJ) and Diks and Panchenko (2005, hereafter DP) tests for comparison purposes. Our findings indicate that all countries reveal significant negative dependence in the long-run dynamics between Oil prices and Brazilian, Indian, and South African currencies. HJ and DP tests suggest that lagged crude oil prices have predictive power for the Brazilian and Russian exchange rates. Furthermore, a robust unidirectional lagged dependence exists from the Brazilian exchange rate to crude oil prices. Concerning the Chinese, Indian, and South African currencies, we find no contagion effects from/to those countries to the oil market. For Russia, there is limited evidence of contagion effects. These findings provide insights for regulators and international investors.