Analyzing the Causality and Dependence between Gold Shocks and Asian Emerging Stock Markets: A Smooth Transition Copula Approach

Woraphon Yamaka and Paravee Maneejuk
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Woraphon Yamaka: Center of Excellence in Econometrics, Faculty of Economics, Chiang Mai University, Chiang Mai 50200, Thailand
Paravee Maneejuk: Center of Excellence in Econometrics, Faculty of Economics, Chiang Mai University, Chiang Mai 50200, Thailand

Mathematics, 2020, vol. 8, issue 1, 1-27

Abstract: This study aims to investigate the causality and dependence structure of gold shocks and Asian emerging stock markets. The positive and negative shocks of gold prices are quantified, and Granger causality-based Vector autoregressive and Copula approaches are employed to measure the causality and contagion effect, respectively, between the positive and negative gold shocks and Asian emerging stock markets’ volatilities. In addition, the nonlinear link between gold and stock markets is of concern and this motivates us to propose a Smooth Transition Dynamic Copula that allows for the structural change in time-varying dependence between gold shocks and Asian stock markets’ volatilities. Several Copula families are also considered, and the best-fit Copula model is used to explain the correlation or contagion effects. The findings of the study show that there is some significant causality between gold shocks and Asian stock markets’ volatilities in some parts of the sample period. We also observe a stronger correlation during the global financial crisis when compared to the pre- and post-crisis periods. In addition, the tail dependence is found between Indian stock and negative gold shock and between Korean stock and negative gold shock, which indicated the existence of the risk contagion effects between gold and these two stock markets.

Keywords: time-varying granger causality; contagion effects; gold shocks; Smooth Transition Dynamic Copula (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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