Economic policy uncertainty and gold return dynamics: Evidence from high-frequency data

Hongwei Zhang, Riza Demirer, Jianbai Huang, Wanjun Huang and Muhammad Tahir Suleman

Resources Policy, 2021, vol. 72, issue C

Abstract: This paper examines the dynamic effect of economic policy uncertainty (EPU) on return and volatility in gold futures via the time varying parameter VAR (TVP-VAR) model with stochastic volatility applied to high-frequency data. We show that the impulse responses of gold returns and volatility to EPU shocks are time-varying and exhibit asymmetric patterns alternately over the sample period. While the effect of EPU on gold volatility is generally stronger in the intermediate to long horizons, the opposite is observed in the case of gold returns, underscoring the additive effects of uncertainty shocks on gold market volatility. The effect of EPU on gold volatility is found to be asymmetric with respect to the nature of shocks and stronger in times of crisis or major events, with such events implied by high EPU values associated with positive volatility jumps in the gold market. Our findings have significant implications for the valuation of gold derivatives and the effectiveness of gold as a potential hedge for financial investors and suggest that investors may risk mis-valuations and consequently, ineffective and costly hedges in response to uncertainty shocks if the time-variation in the response of gold return dynamics to uncertainty shocks is ignored.

Keywords: Economic policy uncertainty; Gold returns; Intraday volatility; TVP-VAR model With stochastic volatility (search for similar items in EconPapers)
JEL-codes: C58 F68 G15 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jrpoli:v:72:y:2021:i:c:s0301420721000933

DOI: 10.1016/j.resourpol.2021.102078

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