TITLE:
Dependence Structure of the US Dollar Index and Crude Oil Prices: A Regime-Switching Copula Approach
AUTHORS:
Yuankui Wang, Xiaoquan Ding
KEYWORDS:
Dependence Structure, US Dollar Index, Crude Oil, Regime-Switching Copula
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.14 No.2,
May
15,
2024
ABSTRACT: In the past few years, the frequent crises have deeply affected the relationship between the US dollar index and crude oil, and it has become imperative to rethink the dependency structure between the two. This paper examines the structure of the dependence between the US dollar index and crude oil prices in 2018-2023 using a Gaussian regime-switching copula model. The model results reveal the existence of two distinct dependency structures: one characterized by positive correlation and the other by negative correlation and these two dependency structures are mutually convertible, with this conversion process exhibiting Markovian properties. The result suggests that there is not a single negative dependence structure between the US dollar index and crude oil but a more complex multivariate structure. The finding enriches the theoretical knowledge of the dependence on the US dollar index and crude oil. In addition, the findings facilitate better choices for policymakers and investors in decision-making.