Gold price dynamics and the role of uncertainty

This study focuses on the dynamics of the gold price against bonds, stocks and exchange rates based on a disaggregation of the underlying relationships across different frequencies applying a wavelet decomposition. To analyze joint extreme movements (i.e. tail dependence), we adopt a copula approach, which helps us to assess the dependence between the returns of gold and other assets in calm and turmoil market times and therefore the hedge and safe haven functions of gold. We also examine whether gold prices are directly affected by changes in macroeconomic uncertainty, economic policy uncertainty and/or CPI forecasters disagreement. Analyzing data for nine economies for a sample period starting in 1985, we find that the role of gold changes significantly after the collapse of Lehman Brothers in 2008. Gold is unable to serve as a hedge or safe haven in the classical sense while the findings for the period prior to 2008 mostly suggest that gold is able to shield investors. Uncertainty measures display a surprising and time-varying relationship with the path of the gold price. While economic policy uncertainty is positively correlated with gold price changes, macroeconomic uncertainty and inflation uncertainty among forecasters are both negatively related to gold price changes.     

Tail dependence between gold and sectorial stocks in China: perspectives for portfolio diversification

This article analyzes the relationship between gold quoted on the Shanghai Gold Exchange and Chinese sectorial stocks from 2009 to 2015. Using different copulas, our results show that there is weak but significant tail dependence between gold and Chinese sectorial stock returns. This means that the dependence between extreme movements of the two assets is not pronounced and confirms the role of gold as a safe haven asset. Based on analyzing the efficient frontier, CCC-GARCH optimal weights, hedge ratios and hedging effectiveness, we further show that adding gold into Chinese stock portfolios can help to reduce their risk. Gold appears to be the most efficient diversifier for stocks of the materials sector and the less efficient for the utilities sector. As a robustness check, we also compare gold to oil and indicate that gold is more efficient than oil in the diversification of Chinese stock portfolios.

     

Performative global finance: bridging micro and macro approaches with a stratified perspective

Theories of performativity can enhance the study of global finance. Taking everyday financial practices seriously, they emphasise the potentially structuring effects and disciplinary nature of finance, and foreground the performative role of economics, financial models, and formulas. It has remained largely overlooked to date that the literature on the performativity of finance can be divided into two distinct approaches. ‘Microperformativity’ is the more actor-oriented approach, beginning its analysis with the exploration of agencements and their practices, or the examination of the social history of mathematical formulas in finance. ‘Macroperformativity’, in contrast, takes its point of departure from the social structure of finance itself, often in relation to national, international, or global power structures. Neither approach provides for an intermediary concept that more explicitly links the micro and macro level. Nor does either approach give adequate analytical consideration to social conflicts and power struggles. To fill these gaps, the paper applies poststructural hegemony theory to reconceptualise performativity as an articulatory logic which accounts for the transition of a particularity towards a universality within a framework of stratified hegemony. Framed accordingly, the concept of performativity accounts more strongly for the social and political processes, ruptures, contestations and contradictions in global finance.     

Cross-section dependence and the monetary exchange rate model – A panel analysis

This paper tackles the issue of cross-section dependence for the monetary exchange rate model in the presence of unobserved common factors using panel data from 1973 until 2007 for 19 OECD countries. Applying a principal component analysis we distinguish between common factors and idiosyncratic components and determine whether non-stationarity stems from international or national stochastic trends. We find evidence that the common factors are I(1) while the idiosyncratic components are I(0). This finding indicates that cross-member cointegration exists and non-stationarity in exchange rates and fundamentals is mainly driven by common international trends. We find evidence that the common factors of the exchange rates and fundamentals are cointegrated. In addition, the estimated long-run coefficients of this common international relationship are in line with the suggestions of the monetary model with respect to income and money.     

The Role for Long‐run Target Values of the Exchange Rate in the Bank of Japan's Policy Reaction Function

This paper analyses whether the Bank of Japan (BoJ) had fundamental concepts in mind when carrying out interventions in the foreign exchange market. We start by considering different long‐run fundamental target values based on a monetary exchange rate model and compare them with more ad hoc targets. Based on these findings, we explain the intervention probability for the BoJ after 1991 based on an ordered probit model by accounting for subperiods and asymmetric effects. It turns out that estimated fundamentally based values for the exchange rate provide additional information for the decision to intervene, in particular after 1995. However, short‐run ad hoc targets seem to be very important, in particular from 1991 until 1995, while medium‐run ad hoc targets gain importance at the end of the 1990s. Overall, we find a ‘leaning against the wind’ strategy in the event of overvaluation relies on ad hoc targets while intervention in cases of undervaluation seems to be guided more strongly by deviations from fundamental values.     

Net Foreign Asset Positions,Capital Flows and GDP Spillovers

Open Economies Review - This paper sheds light on global GDP spillovers in the context of external imbalances. We adopt a Bayesian time-varying panel vector autoregression framework to analyze the...     

Oil and gold price dynamics in a multivariate cointegration framework

This study delivers further insights into oil and gold price dynamics and their relation to U.S. prices and the dollar exchange rate. Previous studies have frequently analyzed this issue regarding the price either of gold or of oil; however, the role of both quantities has not been analyzed simultaneously in a broader context. To tackle this caveat, we use monthly data for the nominal effective dollar exchange rate, oil, gold and U.S. prices from 1976:01 to 2011:11. We carefully analyze the long-run as well as the short-run dynamics and the long-run impact in terms of shocks, applying a cointegrated VAR model. The main conclusion we reach is that although gold and oil are both important commodities, their economic impact in terms of their shocks differs significantly. In the long-run, both quantities seem to be positively related and shocks to the gold price drive the system. In addition, the gold-oil spread is positively related to U.S. consumer prices, which implies a stronger relationship of consumer prices to the former.     

Oil price and FX-rates dependency

Oil prices and exchange rates against the dollar have both experienced long swings over the recent decade. Regardless of the great amount of research, some issues are still open to debate. In this vein, this paper focuses on the evolution of the relationship between oil prices and dollar exchange rates of 12 oil exporting and oil importing countries based on a dynamic copula approach. We use daily data for two 5-year periods between 2003 and 2013, taking the collapse of Lehman Brothers as the dividing point. Our results have four main implications: first, the intensity of relationship between oil prices and FX-rates has increased over time even if the peak of the financial crisis is included. Second, the increased tail dependency shows that extreme events are likelier to occur simultaneously for both series. Third, the dependency has become more dynamic after the financial crisis and is therefore better characterized by time-varying copulas. Finally, currencies of oil importers and oil exporters display a different dependency structure against the US dollar in the case of rising oil prices with the latter appreciating and the former depreciating.     

Government activity and economic growth – one size fits All?

This study investigates the role of government activity in economic growth, arguing that economic systems are important and that, therefore, one size of government does not fit all countries. Taking a panel of 111 countries over the years from 1971 to 2010, we consider clusters of economic systems as predicted by an extended Varieties of Capitalism (VoC) approach. The empirical growth impact of government activity is positive but u-shaped and depends on both the quality of institutions and the institutional setting. For the polar cases of liberal economies and Scandinavian coordinated market economies, the potential growth impact is quite similar and superior to other clusters of countries. However, the maximum growth effect is realized for above-average levels of government activity in the Scandinavian countries, while this would be detrimental to growth in liberal countries. Hence, high levels of government activity are consistent with growth but only in economic systems consistently rooted in a high level of government activity.     

The cross-country importance of global sentiments—evidence for smaller EU countries

This paper examines the importance of the economic sentiments of some macroeconomic key variables in Estonia, Slovenia and Latvia. We analyze the importance of domestic as well as foreign sentiments with respect to these economies against the background of their accession to the European Monetary Union. For this purpose, we develop and apply a framework which is based on a restricted autoregressive model. We focus on two issues: firstly, we investigate the relationship between domestic stock prices, income and sentiments; and, secondly, we take external effects stemming from EMU and US share prices and sentiments into account. Our results show that European sentiments are important for income and domestic sentiments. Furthermore, we are able to establish linkages between global share prices and domestic income. From a more general perspective, we find a significant positive influence stemming from (domestic) share prices on sentiments in Estonia and Latvia, and also find evidence for an inverse relationship in Latvia.