ABSTRACT
We attempt to predict the exchange rate returns of the BRICS (Brazil, Russia, India, China, and South Africa) countries with the global oil price using monthly datasets covering the period of 1973 to 2020. We formulate a predictive model that accounts for the salient features of the predictor and the predicted series in line with the recent literature. We establish that oil price is a good predictor of exchange rate returns for both net oil exporters (Brazil and Russia) and net oil-importers (South Africa and China). The consideration of asymmetries improves the predictability of an oil-based model for exchange rate movements and ignoring the same may lead to wrong conclusions. Finally, all the variants of the oil-based model outperform the benchmark model albeit with higher out-of-sample forecast gains with a nonlinear (asymmetric) model.
Acknowledgments
We would like to thank the Editor-in-Chief, Professor Paresh Kumar Narayan, and two anonymous referees for many helpful comments. However, any remaining errors are solely ours.
Supplemental Material
Supplemental data for this article can be accessed on the publisher’s website.
Notes
1. In addition, the significant role of oil price in influencing macro fundamentals is well documented in Hamilton (Citation2009).
2. Some of the attractions to the BRICS countries are highlighted in a supplementary file attached to this article.
3. Studies such as Bannigidadmath and Narayan (Citation2015), Narayan and Bannigidadmath (Citation2015), Narayan and Gupta (Citation2015), Phan, Sharma, and Narayan (Citation2015), Devpura, Narayan, and Sharma (Citation2018); Salisu et al. (Citation2019a, Citation2019b & Citation2019c), among others offer useful guidance on the empirical analysis.
4. This outcome may be partly attributable to the positive relationship between Covid-19 pandemic and Economic Policy Uncertainty (Iyke Citation2020c) in which the latter is derived from macroeconomic variables.
5. We owe this contribution to one of the reviewers to highlight the role of Covid-19 pandemic in the predictability of oil price for exchange rate movements.
8. We employ the Narayan and Liu (Citation2015) GARCH-based unit root test with structural breaks and the results are available upon request.
11. Another important variable influenced by the pandemic is the stock market (see Gil-Alana and Claudio-Quiroga Citation2020; Prabheesh Citation2020; Salisu, Ebuh, and Usman Citation2020; Salisu and Sikiru Citation2020; Sharma Citation2020) and its connection with oil and exchange rate is crucial given its mediating role particularly in terms of capital movement. However, we set aside this area for future research.
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