The Norwegian Krone, Brent Crude Oil and Global Volatility: Determination of the NOK Between 2001 and 2021

Abstract

This thesis will study the behaviour of the Norwegian krone using the oil price, interest rate differentials, price level differentials, an index for global volatility and the US dollar as explanatory variables. The effects of these variables will be tested on the Norwegian krone against the Euro, Great British Pound and US Dollar, based on monthly observations from March 2001 to December 2020. The empirical analysis will be constructed applying the OLS framework and its underlying assumptions for time series regression. Additionally, we use the Augmented Dickey-Fuller framework for testing whether our data exhibit any non-stationary characteristics. As an augmentation, we apply the Engle-Granger Cointegration test which purposes to reveal potential long-term relationships between the dependent and independent variables. From the Engle-Granger Cointegration test we find none of the variables to exhibit a cointegrated relationship, why we proceed with the concepts of the Augmented-Dickey Fuller test to derive our baseline specification. Our baseline findings discover the oil price and interest rate differential to be most influential on the Norwegian krone, while the other two explanatory variables have a varying significance among the bilateral exchange rates. Our results are established robust after controlling for potential spill-over effects from the US dollar. Our 24-month rolling regression reveals a distinct time-varying relationship between changes in the oil price and the Norwegian krone. Thus, we investigate potential nonlinearities between the oil price and the krone as an extension to our baseline model. From these we find large oil price changes to influence the krone against the Euro and US dollar, while certain threshold levels matter for all currency pairs. A threshold of $40 pb turns out as most important, and our results show the aggregate effect of an oil price change to be twice as large when it is below this level. Notably, general oil price changes appear to be robust for abnormal changes, implying a consistent relationship between the Norwegian krone and the oil price.