Abstract
•A Regime switching-quantile regression model for the US exchange rate-oil nexus.•Oil price affects exchange rates differently through the distribution’s levels.•Oil price effect varies through countries and oil market regimes.•Financial contagion is detected during the oil price shock of 2007.
In this paper, we investigate the impact of oil price changes on exchange rates in some oil-related economies. Financial contagion effects during recent oil price shocks are also examined. We employ a novel approach based on the Markov regime switching -quantile regression model to allow oil prices to switch between different regimes. Our results show that the impact of oil price changes on exchange rate markets varies in significance, size, and sign through the distribution of exchange rate returns. Furthermore, the response of currency markets to oil price fluctuations changes among countries and oil price regimes, and are stronger during high volatility regimes. Moreover, financial contagion is detected during the oil price shock of 2007 by the dramatic increase of interdependence between oil and all currency markets, except for Japan. However, during the mid-2014 oil price collapse, contagion effects are detected only for the Australian currency market.