Precious metals–exchange rate volatility transmissions and hedging strategies

This study examines the conditional volatility and correlation dependency and interdependency for the four major precious metals (i.e., gold, silver, platinum and palladium), while accounting for geopolitics within a multivariate system. The implications of the estimated results for portfolio designs and hedging strategies are also analyzed. The results for the four metals system show significant short-run and long-run dependencies and interdependencies to news and past volatility. Furthermore, these results become more pervasive when the exchange rate and federal funds rate are included. Monetary policy also has a differential impact on the precious metals and the exchange rate volatilities. Finally, the applications of the results show the optimal weights in a two-asset portfolio and the hedging ratios for long positions.     

Shock and volatility spillovers among equity sectors of the Gulf Arab stock markets

The major objectives of this study are twofold. The first objective is to examine the dynamic volatility and volatility transmission in a multivariate setting using the VAR(1)–GARCH(1,1) model for three major sectors, namely, Service, Banking and Industrial/or Insurance, in four Gulf Cooperation Council (GCC)’s economies (Kuwait, Qatar, Saudi Arabia and UAE). The second is to use the models’ results to compute and analyze the optimal weights and hedge ratios for two-sector portfolio holdings, comprised of the three sectors for each country. The results suggest that past own volatilities matter more than past shocks and there are moderate volatility spillovers between the sectors within the individual countries, with the exception of Qatar. Moreover, the values for ratios of hedging long positions with short positions in the GCC sectors are smaller than those for the US equity sectors. The optimal portfolio weights favor the Banking/financial sector for Qatar, Saudi Arabia and UAE and the Industrial sector for Kuwait.     

Relationships between Financial Sectors’ CDS Spreads and Other Gauges of Risk: Did the Great Recession Change Them?

The objectives are to discern how the three financial sectors’ credit default swap (CDS) spreads interrelate to each other and with three other risks in terms of possible contagion, competition, interdependence and independence relations under the full sample and two subperiods: the 2007 Great Recession and the 2009 Recovery, and to assess the impact of QE1 on those risks in the second subperiod. The results indicate that the own and cross‐effects among the CDSs and the other risk measures are significant and mixed, but all in all contagion is dominant. The system has become less stable and less adjusting to the equilibrium in the first subperiod. QE1 in the second period decreases risks but increases inflationary expectations.     

Long memory and structural breaks in modeling the return and volatility dynamics of precious metals

We investigate the potential of structural changes and long memory (LM) properties in returns and volatility of the four major precious metal commodities traded on the COMEX markets (gold, silver, platinum and palladium). Broadly speaking, a random variable is said to exhibit long memory behavior if its autocorrelation function is not integrable, while structural changes can induce sudden and significant shifts in the time-series behavior of that variable. The results from implementing several parametric and semiparametric methods indicate strong evidence of long range dependence in the daily conditional return and volatility processes for the precious metals. Moreover, for most of the precious metals considered, this dual long memory is found to be adequately captured by an ARFIMA–FIGARCH model, which also provides better out-of-sample forecast accuracy than several popular volatility models. Finally, evidence shows that conditional volatility of precious metals is better explained by long memory than by structural breaks.     

Systematic risk, and oil price and exchange rate sensitivities in Asia-Pacific stock markets

This paper examines the relationship between beta risk and realized stock index return in the presence of oil and exchange rate sensitivities for 15 countries in the Asia-Pacific region using the international factor model. Thirteen of the 15 countries have the expected beta signs and show significant sensitivity to domestic risk when the world stock market is in both up and down modes. In terms of oil sensitivity, only the Philippines and South Korea are oil-sensitive to changes in the oil price in the short run, when the price is expressed in local currency only. Basically no country shows sensitivity to oil price measured in US dollar regardless whether the oil market is up or down. Nine countries are affected by changes in the exchange rate. In terms of relative factor sensitivity distribution, one is willing to conclude that these stock markets are more conditionally sensitive to local currency oil price changes than to beta risk wherever the relationships are significant.     

The impact of value added components of GDP and FDI on economic freedom in Europe

This paper investigates the possibility of a long-run relationship between the Economic Freedom Index (EFI), Foreign Direct Investment (FDI) and value added components of GDP in thirty Eastern, Central and Western European countries. The study further examines whether the FDI and sector-specific components of GDP have any significant impact on economic freedom for these countries. We use annual data and employ Pedroni and KAO panel cointegration analyses to assess the long-run relationships. The results indicate that there is a significant long-run relationship between the variables under study. Moreover, the evidence shows that the service and industry value added components positively affect EFI, while the agriculture value added component has a negative effect on EFI. However, contrary to the prior literature, we observe a marginally significant and negative relationship between EFI and FDI in the random effects model.     

Asymmetric convergence in US financial credit default swap sector index markets

This study examines the asymmetric adjustments to the long-run equilibrium for credit default swap (CDS) sector indexes of three financial sectors – banking, financial services and insurance – in the presence of a threshold effect. The results of the momentum-threshold autoregression (M-TAR) models demonstrate that asymmetric cointegration exists for all pairs comprised of those three CDS indexes. The speeds of adjustment in the long-run are much higher in the case of adjustments from below the threshold than from above for all the pairs. The estimates of The MTAR-VEC models suggest that the dual CDS index return in each sector pair participates in the adjustment to equilibrium in the short- and long-run taken together. But in the long-run alone, only one of the two spreads in each pair participates. Policy implications are also provided.