Co-movement of oil price, exchange rate and stock index of major oil importing countries: A wavelet coherence approach

The study examines the co-movement between oil price and macroeconomic indicators such as exchange rate and stock indices of major oil importing countries. We differ from previous studies by examining the macroeconomic dynamics of major oil-importing countries during all economic cycles across different frequencies, using wavelet coherence analysis. We use nominal price rather than real price to make the results more meaningful for traders and institutional investors. Our analysis is based on 3012 observations covering the period 2003-14 for fifteen major oil importing countries. Wavelet coherence analysis indicates a high coherence between oil price and macroeconomic indicators across all the countries during the financial crisis. The nominal exchange rates tend to have a negative relationship with benchmark oil prices except Japan in the long run and South Korea in the medium run. Stock indices tend to have a positive relationship with benchmark oil prices in both long and medium run. S&P is leading the oil price, whereas SSE50, Nikkei 225, NIFTY, KOPSI, DAX, CAC, IBEX, FTSSI, FTSEMIB, AEX, TWSE, XU 100, LQ45 and BEL 20 are lagging the oil price in the long run. In the medium term, except for NIFTY, oil price is leading the stock market index. Overall, the results indicate that the oil price and stock indices of the major oil-importing countries are correlated in the long and medium term, but not in the short term. The lead–lag relationship between oil price and macroeconomic indicators are observed to change across frequency and time. While exchange rate offers diversification benefits, stock market indices provide no diversification avenues, since the pattern of co-movement of stock market indices and oil prices are similar across all oil importing countries. The results have implications for individual traders and institutional investors while designing their portfolio for short, medium and long term time horizons.