Book Review

Date01 February 2019
Published date01 February 2019
Subject MatterBook Review
Book Review
Bhaskar Bagchi, Dhruba Ranjan Dandapat and Susmita Chatterjee,
Dynamic Linkages and Volatility Spill Over: Effects of Oil Prices on
Exchange Rates and Stock Markets of Emerging Countries, Bingley:
Emerald Group Publishing Limited, 2016, US$86.94, 212 pp.,
ISBN 9781786355546.
The oil price dynamics over the last decade have been significantly influenced by
both political and economic factors. In turn, the fluctuations in crude oil prices
have led to repercussions in both currency and stock markets. The book by
Bagchi et al. explores the relationship between crude oil prices, exchange rate and
stock prices in India, Brazil, Russia, China, South Africa and South Korea between
April 2003 and March 2016. The link is explored at a time that includes a period
(between 2014 and 2016) that witnessed a sharp fall in crude oil prices. The sample
of countries include both important crude oil exporters (Russia and Brazil) and
importers (China, India, South Africa and South Korea).
The effect of movements in crude prices on exchange rates and stock prices
depends on two crucial factors: (a) whether the country is a crude oil exporter or
an importer, and (b) whether the prices are rising or falling. Keeping other varia-
bles constant, during periods of falling crude oil prices income falls and balance
of trade is adversely affected in crude oil exporting countries. The negative
income effect leads to a fall in stock prices and the negative balance of trade effect
leads to a depreciation of the currency. The opposite happens during a rise of
crude oil prices.
For crude oil importers, a decrease in crude oil prices tends to reduce prices
(assuming that they are not rigid in the downward direction) and increases the real
balance of wealth (the renowned Pigou effect) leading to higher consumption and
hence demand, income and ultimately stock prices. On the other hand, the balance
of trade tends to improve leading to exchange rate appreciation. The opposite
holds for a rise in price of crude oil.
These effects are of course not mandatory as these variables are affected by a
host of other factors and the effects will depend on the control variables (model)
used. This book uses a Mundell–Fleming type model in Chapter 3 to trace out
some of the possible effects. Related issues not captured in this model are
discussed as well: for instance, there is a discussion on the short versus the long
run adjustment when crude oil is taken as a component of energy which in turn is
Foreign Trade Review
54(1) 58–60, 2019
©2019 Indian Institute of
Foreign Trade
Reprints and permissions:
DOI: 10.1177/0015732518810901

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