Causality and volatility patterns between gold prices and exchange rates |
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| Institution: | 1. Institute of Economic Studies, Charles University, Opletalova 26, 110 00, Prague, Czech Republic;2. CESifo, Munich;3. IOS Regensburg;4. The William Davidson Institute at the University of Michigan Business School;5. Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic, Pod Vodarenskou Vezi 4, 182 00 Prague, Czech Republic;1. Department of Economics, University of Santiago de Compostela, Avda. Xoán XXIII s/n, 15782 Santiago de Compostela, Spain;2. Post graduate programme in management—PPGA, Unifacs, Rua Dr. José Peroba 251, 41770-235 Salvador, Brazil;1. University of Duisburg-Essen, Department of Economics, Chair for Macroeconomics, D-45117 Essen, Germany;2. Kiel Institute for the World Economy, Hindenburgufer 66, D-24105 Kiel, Germany;3. University of Bremen, Department of Business Administration, Chair for Applied Statistics and Empirical Economics, D-28359 Bremen, Germany;4. University of Duisburg-Essen, Department of Economics, Chair for Econometrics, D-45117 Essen, Germany;5. FOM Hochschule für Oekonomie & Management, University of Applied Sciences, Herkulesstr. 32, D-45127 Essen, Germany |
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| Abstract: | This paper provides a new perspective on the link between gold prices and exchange rates. Based on gold prices denominated in five different currencies and the related bilateral exchange rates, we put causalities and short-run volatility transmission under closer scrutiny. We provide evidence that the identification of a strong hedge function of gold requires an explicit modeling of the volatility component. For all currencies, exchange rate depreciations initially have a negative impact on the gold price after one day which turns out to be positive after two days in most of the cases. Contrary to previous studies, our results point to a specific role of the dollar in the context of gold-exchange rate relationships: volatility of dollar exchange rates more frequently results in strong hedging functions of gold prices. Furthermore, the gold price denominated in the US dollar tends to increase after a depreciation of the dollar. |
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| Keywords: | Exchange rates GARCH Gold Hedge Volatility |
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