Oil Price Volatility and Foreign Exchange Rates Nexus: Evidence From Emerging Countries in COVID-19 Period

Öner S.

in: Administrative and Economic Science Research, Theory, Yuksel Akay UNVAN, Editor, Livre de Lyon, Lyon, pp.1-22, 2021

  • Publication Type: Book Chapter / Chapter Research Book
  • Publication Date: 2021
  • Publisher: Livre de Lyon
  • City: Lyon
  • Page Numbers: pp.1-22
  • Editors: Yuksel Akay UNVAN, Editor


Emerging countries' dependence on oil will continue as long as they continue to grow. Therefore, emerging countries' economies are closely affected by fluctuations in oil prices due to the most important input of the production process. Although technology and productivity gains in OECD countries have been flat in recent years, the demand for oil is increasing due to rapid growth in emerging markets. For example, oil consumption in emerging countries such as China, Brasil, Argentina, India, Turkey, Rusia and South Africa has increased by about 16% in the last five years (CFR, 2021).

In 1987, a major crisis occurred in the United States, and demands for the risk to be measured due to uncertainties in the financial markets in the crisis environment began to increase. Thus, volatility indices have started to be created to measure risk. The first uncertainty measurement was in 1993 with the first volatility index (VIX index), using the implicit volatility of stock index options by the Chicago Board Options Exchange (CBOE). In 2004, CBOE began to simplify the volatility index calculation methodology even further and to create a volatility index in emerging countries. After increasing volatility between 2007 and 2008, three new uncertainty indices began to be calculated in July 2008 to measure the uncertainty in oil and gold prices and the Euro / Dollar parity. The calculation method of this new index uses the VIX index calculation method, which measures uncertainty in the stock market. The CBOE Crude Oil Volatility Index (OVX), which is the main subject of this study, is calculated over the US oil fund option prices and measures the market expectation for the 30-day volatility of crude oil prices. The GVZ index is calculated through options written on SPDR gold shares, which reflects the 30-day volatility of gold prices, while another index, the EVZ, is based on the currency shares euro confidence options and measures the market expectation for the 30-day volatility of the Euro/Dollar exchange rate. (Siriopoulos and Fassas, 2013, p. 234).

As a result of this study, the relationship between the OVX index, which is an indicator of the uncertainty in oil prices, and the currencies of developing countries are tried to be determined during the covid-19 pandemic period. Therefore, the OVX index and the exchange rates of ten developing countries – Turkey, Argentina, Brazil, Indonesia, Philippines, South Africa, India, Mexico, Poland and Russia – are chosen as examples to examine the causal relationship between exchange rates.