The relation between oil price and exchange rate : evidence from Norway
Abstract
This paper investigates if changes in the Crude Brent oil price can predict changes
in the nominal Norwegian Krone – U.S. Dollar exchange rate using daily, weekly,
monthly, and quarterly datasets. The predictability content is evaluated through
several exercises using one-step-ahead pseudo out-of-sample forecasts. The test
results yield a robust out-of-sample relationship using contemporaneous oil price
changes at all test frequencies. We also find that lagged oil prices can predict
future exchange rates using daily and weekly frequencies.
Our main contribution is the evidence that oil prices can significantly
forecast future exchange rates consistently for the sample period under
consideration and that using the correct benchmark for oil price is crucial for
capturing predictability. In addition, we include more recent data and we consider
a new frequency where a transitory predictive ability is found using weekly data.
Description
Masteroppgave(MSc) in Master of Science in Business, Finance - Handelshøyskolen BI, 2017