Abstract

This paper studies the impact of crude oil price on the conditional mean and volatility of external reserves and the empirical finding suggests a significant positive impact of crude oil price. The monthly external reserves and crude oil price from January 1995 to December 2013 are modeled using the GARCH-M and EGARCH-M. The Augmented Dickey-Fuller and Phillips-Perron statistical tests for unit root suggest the data to be stationary in first difference. Also, each variable show evidence of ARCH effect. Results from GARCH estimate indicate evidence of a persistent shock to volatility. The findings show the volatility term to be statistically significant in the mean equations implying that the mean is not constant but changes with volatility. In addition, the result shows that oil price variability (volatility) has a positive impact on the volatility of external reserves. While the coefficient, ? is positive in the EGARCH model, meaning that the impact on the conditional variance of the external reserves is asymmetric. Because ? is positive, evidence of leverage effects does not exist.

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