Examining The Cointegration Relationship and Volatility Spillover Between Imported Crude Oil Prices and Exchange Rate: The Turkish Case

Abstract

This paper aims to investigate how crude oil price change affects exchange rate volatility both in the short and long run for Turkish economy. For this purpose we employed crude oil price and exchange rate monthly data that covers the period of 1985M01-2015M11. Firstly short and long run relation between two series is investigated by ARDL bound testing approach and our results show that there is co-integration among variables that means two series move together in the long run. According to results, the effect of crude oil price change on exchange rate volatility in the long-run analysis is found negative statistically significant. However, in the short run analysis coefficient of error correction term is seen statically significant and negative. Therefore, the deviation among the variables converge to each other in the long-run equilibrium level. In the last section of paper we apply the newly developed causality in variance test monthly data from 1985M01 to 2015M11. The variance causality test shows that oil market volatility spills on the exchange rate in Turkish economy.