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Purpose

In recent years, the world has faced a series of crises, including COVID-19 and the Russia–Ukraine conflict. These events have significantly changed the dynamics of the financial commodity markets. Considering the significance of the US dollar and crude oil as essential financial instruments, it is crucial to analyze the changes in their interactions to understand the implications for economic growth. This study aims to investigate the relationship between the US dollar index and crude oil prices from 2017 to 2023.

Design/methodology/approach

A regime-switching copula model was used in this study. Although each global crisis can introduce new changes to these relationships, the general static and time-varying copulas may more accurately represent the dynamics of these connections. Both the time-varying and static copulas exhibit insensitivity to anomalies. By integrating the strengths of copula and Markov regime-switching (MRS) models, the MRS copula model serves as a dynamic mixed copula model. It can incorporate multiple copulas to address various research questions.

Findings

The empirical findings indicate that the Gaussian copula model with regime switching is more effective in fitting the experimental data. The results of the model fitting revealed two distinct dependency structures: one exhibited a positive correlation, and the other demonstrated a negative correlation. This finding contrasts with the prevailing literature, which typically indicates a negative correlation between the US dollar index and crude oil prices. Furthermore, there is a reciprocal relationship between these two dependency structures, which exhibits Markovian characteristics.

Research limitations/implications

This study has several limitations. To improve the empirical utility of the model, some researchers have refined the copula within the MRS framework, while others have enhanced its applicability by incorporating additional variables. This opens up potential avenues for further investigations.

Practical implications

The results have significant implications for managers. Furthermore, compared to the standard model, the regime-switching copula model is more responsive and sensitive. In light of the recent trend of dollarization, policymakers and central banks must reconsider their monetary policies for conducting international business, diversify their foreign-exchange holdings and enhance their risk aversion.

Originality/value

The originality of this paper lies in the data it provides to support the conclusion that the MRS copula model outperforms the basic copula model, thereby facilitating generalization of the MRS copula model. These findings contribute to the advancement of knowledge among scholars regarding the changes in the interconnection structure across financial markets resulting from crises. This implies the ability to make more informed decisions for both investors and governments.

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