The Impact Of Uncertainty In Crude Oil Market On Exchange Rates: Pricing And Mechanism

Exchange rate pricing has been a hot and important issue in the field of asset pricing,and research in this area has been in the ascendant for more than three decades.Using crude oil market information to predict exchange rates is a key research direction in exchange rate pricing.Crude oil has extremely important value in the world's industrial production,which known as the"black blood"or"black gold"of the economy and the entire society.With the gradual evolution of global financialization,the important influence of crude oil on the development of economy and financial markets is self-evident.However,at present,there is no consensus on whether the crude oil market information has the effect on exchange rate pricing.On the other hand,in recent years,research on uncertainty is in full swing.Researches on uncertainty and asset pricing have gradually become the focus.Uncertainty covers the complex and comprehensive economic connotation and information that may be able to explain the current plight of exchange rate pricing.Moreover,few studies have considered the pricing of the exchange rate market with the new type of uncertain information of the crude oil market.In addition,considering that the international crude oil market is crucial for China's economic development,and for China's exchange rate market,related research has been stagnant due to the existence of certain regulations in the previous period.In this context,it is necessary to fully study the impact of uncertainty from the crude oil market on China's exchange rate in a suitable method.Therefore,in order to make up for the lack of existing research,this paper aims to study the pricing effect of crude oil market uncertainty on the exchange rate market and explain its impact mechanism.The main work of this paper are as following:1)constructing the crude oil variance risk premium index as a proxy for crude oil market uncertainty;2)using quantitative regression models,wavelet interference analysis,dynamic assets allocation,Quantile-on-quantile and other methods to comprehensively study the pricing effect of crude oil market information on the exchange rate market from multiple perspectives,and 3)exploring its economic meaning,analyzing the impact mechanism between the uncertainty of the crude oil market and the exchange rate.This article also 4)conducts a special analysis on the uncertainty of the crude oil market and the Chinese exchange rate,with a view to reaching some enlightening conclusions.The innovations of this paper are:(1)A novel research perspective based on uncertainty.Some studies have started from crude oil prices,shocks,and volatility(realized volatility or implied volatility),and it has not yet been agreed whether crude oil information has pricing effectiveness.This article focuses on the uncertainty of the crude oil market,analyzes it from the perspective of risk premium,and creatively constructs the crude oil variance risk premium variable.Based on the continuation of the important relationships between macroeconomic variables and exchange rates,this paper explores oil VRP's pricing on the exchange rate markets.(2)The pricing effect of crude oil market uncertainty on exchange rate is comprehensively revealed from multiple perspectives such as out of sample and currency carry trade.This paper analyzes the pricing effect of crude oil market uncertainty on the exchange rates of commodity currency countries and emerging market countries from both vertical and horizontal perspectives.In the process of time series research,not only the general forecasting framework,the OLS and other econometric regression methods for research,the use of out-of-sample R~2,adjustment of MSFE and other statistical indicators are used to evaluate the uncertainty of the crude oil market's out-of-sample prediction capabilities,but also adopting wavelet interference method,wavelet decomposition and other methods study oil VRP's pricing effectiveness from multiple scales.In the process of panel data research,this paper constructs a currency arbitrage asset portfolio and uses a static panel model with fixed effects and GMM model to analyze its pricing effectiveness.(3)Economic interpretation of pricing effectiveness.The mere predictability and panel statistical analysis cannot profoundly reveal the economic meaning of crude oil market uncertainty with predictive power,nor can it explain how its influence mechanism on exchange rate changes is.Its research significance to investors and regulators cannot be reflected.This is also a point often ignored in the existing literature.Based on econometric analysis,this paper combines the effects of uncertainty on the classic exchange rate pricing present value model and its latest development mechanism to study the transmission mechanism of crude oil market uncertainty to the exchange rate market.At the same time,this paper also uses an empirical model to verify the correlation between the crude oil market uncertainty and global risks or traditional macroeconomic variables;and constructs an investment portfolio to examine whether investors can obtain economic benefits after considering the uncertainty of the crude oil market.In this paper,the economic analysis of the pricing effect of the uncertainty of the crude oil market on the exchange rate market is carried out in detail,which has certain innovation.The main research conclusions obtained in this study are as follows:(1)The crude oil market uncertainty represented by the crude oil variance risk premium can well predict the yield of five commodity currencies(Australian dollar,Canadian dollar,New Zealand dollar,Norwegian krone and South African rand),and for commodities relevant exchange rate change(for Chilean peso,Swedish krona,and Russian ruble)rates,oil VRP also have good prediction capabilities,which can overcome the random walk model of exchange rates.This prediction ability is robust and exists both in short term and long term.This discovery breaks the Meese-Rogoff puzzle.(2)The crude oil market uncertainty is still effective in predicting exchange rate changes in some emerging market countries,and the crude oil market uncertainty is more predictable in the long run.This is an important difference between the two types of exchange rate markets in terms of the predictive ability of oil VRP.(3)The uncertainty of the crude oil market has a significant impact on the excess returns of currency carry trade.The generation of excess profits of currency carry trade includes a certain risk premium factor in the crude oil market.The ability to influence the uncertainty of the crude oil market increases significantly as interest rate differences increase,and the impact is negative.That is,the increase in the uncertainty of the crude oil market will significantly reduce the excess returns of currency arbitrage.(4)Uncertainty in the crude oil market can indirectly affect exchange rate changes by affecting output,money supply,and risk premium compensation;it can also directly change the currency needs of the two countries through cross-border investment,thereby directly affecting the exchange rate.The uncertainty of the crude oil market contains characteristics that are different from global risks and traditional macroeconomic variables,which can effectively enable hedge investors to avoid investment losses.(5)The impact of crude oil market uncertainty on RMB exchange rate depends on the current level of the exchange rate and the level of uncertainty in the crude oil market.Driven by the expected uncertainty of the crude oil market,it is easy to form a situation of"strong and strong,weak and weak":When the RMB is under depreciation pressure,the uncertainty of the low crude oil market will cause the RMB to continue to devalue;Under the pressure of appreciation,high crude oil market uncertainty will cause the RMB to continue to appreciate.When the crude oil market is uncertain,people have not formed effective expectations,and the RMB exchange rate has not changed significantly.For the unpredictable uncertainty of the crude oil market,there are three types of effects:(1)When the RMB exchange rate yield is low,the high crude oil uncertainty shock will cause the RMB to depreciate rapidly;(2)When the RMB exchange rate gain is in the middle,the impact of low uncertainty on the crude oil market caused the appreciation of the RMB;(3)When the RMB exchange rate income was at a high level,the impact of low uncertainty on the crude oil market caused the RMB to depreciate.An improved forecasting model containing the uncertainty of the crude oil market based on this characteristic has a good forecasting effect on RMB exchange rate.For policy makers or regulators,it is necessary to fully understand the important role of uncertainty in the crude oil market,whose changes will cause fluctuations in the global exchange rate market.We must soberly realize that the impact of uncertainty in the crude oil market has long-lasting,and we must be predictive and forward-looking in the formulation of management decisions or risk prevention systems.We should not make short-sighted mistakes.Especially for China's policy makers or regulators,they can take countermeasures to reduce the impact on the fluctuation of the exchange rate market and stabilize the market according to the prediction of the uncertainty of the crude oil market.For investors,it helps investors allocate assets globally and manage portfolios involving currencies.Investors should fully consider the structural differences between countries when allocating currency assets,predict the changes in the money market differential income in time based on changes in the crude oil market,study the direction of income changes,and make strategic adjustments in advance to obtain economic benefits.The work and results of this paper take the uncertainty of the crude oil market as the starting point,reveal the potential factors of the exchange rate pricing and its economic connotation,and explore the relationship between the uncertainty of the crude oil market and the exchange rate pricing from many new perspectives.This study is helpful to understand the mechanism and process of exchange rate formation under the background of increasing global economic uncertainty and the prominent status of crude oil,and has further enriched and expanded asset pricing theory.At the same time,this paper reveals the relationship between commodity markets and exchange rate markets,provides research ideas for the relationship between macroeconomics,financial markets and commodity markets,and provides strategic support for global asset investment and asset allocation in the post-crisis era.It has strong theoretical and practical significance to enable domestic regulators to deeply understand the sources and main causes of exchange rate changes,and to provide a basis for policy formulation and implementation.