An Econometric Analysis of the Relationship Between the Oil Price and the Value of the Norwegian Krone

Abstract

The purpose of this thesis is to investigate the relationship between the oil price and the value of the Norwegian krone. After the oil-price dropped 60% between July 2014 and January 2015, it seems that market consensus has evolved with respect to how the krone reacts to variations in the oil price. This raises the interesting question of whether the relation between these highly important macroeconomic variables has changed in the recent past.
Overall, we do not find statistical evidence supporting that the historical interlinkage is broken, yet we conclude that there has been a change in the relationship following the oil price collapse in 2014. We find that a long run, cointegrating relationship exists between the oil price and the respective exchange rate, solely after the oil price drop.
Time-series analyses have been carried out on daily data from 2001 to 2016, investigating the relation between the oil price and the value of the Norwegian krone. The analysis was split in subsamples to give room for comparison of results across different time periods, and to verify whether the results were robust when subjected to periodic events such as the financial crisis and the 2014 oil price drop. The Augmented Dickey-Fuller and Breusch-Godfrey tests were applied to investigate the nature of the variables with respect to stationarity. The test results suggested that all variables under investigation were integrated of order 1, across all samples. The two step Engle-Granger test was applied to examine whether there exists a long term relation among the variables. Where cointegration was found, error correction models were used to examine potential Granger causality in the short and long run. Granger causality from the oil price to the exchange rates was present both in the short and long term, while the reverse revealed an effect present only in the long run. For non cointegrated variables, short run Granger causality was tested using ADL models. Bilateral Granger causality was found in all samples, except for the period between January 2001 and July 2008, where unidirectional causality was present from the oil price to the exchange rates.
The thesis is supplemented with an analysis on monthly data to incorporate movements in potentially omitted variables. The section is included to provide a robustness check of the initial analyses.
The overall findings provide a mixed picture of the relation between the variables, which evidently relies on movements in a range of variables above and beyond what can be captured by the scope of econometric modelling. The thesis however provides an important contribution to the literature on the relation between the oil price and the value of the Norwegian krone.