‘Nonlinear causality between crude oil price and exchange rate: A comparative study of China and India’ - A failed replication (negative Type 1 and Type 2)

Glauco De Vita, E. Trachanas

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    Abstract

    Evidence published in this journal by Bal and Rath (2015) purports a bidirectional nonlinear causality between oil price and India’s exchange rate and, for China, unidirectional nonlinear causality running from exchange rate to oil price. Their entire testing protocol and ensuing results rest upon claims that all the variables contain a unit root. We raise several critical issues and revisit the order of integration of the series as well as their cointegration and Granger causality properties through a ‘pure replication’ and a ‘reanalysis’. Contrary to Bal and Rath (2015), when we repeat their estimated model with their specification of the Ng and Perron (2001) unit root test on their data, we find that their oil price series (ROL) is level stationary (negative replication Type 1), a result which makes all their subsequent results biased and misleading. Our reanalysis confirms that ROL is I(0), linearly as well as nonlinearly. We also find that the basic bivariate model proposed by Bal and Rath (2015) fails to produce statistically robust and stable cointegrating patterns. Nonlinear causality tests confirm the absence of any nonlinear causality for both countries (negative replication Type 2).

    NOTICE: this is the author’s version of a work that was accepted for publication in Energy Economics. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Energy Economics, 56 (28 March 2016) DOI: 10.1016/j.eneco.2016.03.014

    © 2016, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International http://creativecommons.org/licenses/by-nc-nd/4.0/
    Original languageEnglish
    Pages (from-to)150–160
    Number of pages11
    JournalEnergy Economics
    Volume56
    DOIs
    Publication statusPublished - 28 Mar 2016

    Bibliographical note

    Due to publisher policy, the full text is unavailable on the repository until the 28th of September 2017.

    Keywords

    • Replication
    • Causality
    • Oil price
    • Exchange rate
    • Unit root
    • Cointegration

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