Reserve currency and the time-varying link between uncertainties in commodity and financial markets

Baris Kocaarslan ()
Additional contact information
Baris Kocaarslan: EDC Paris Business School

Financial Markets and Portfolio Management, 2025, vol. 39, issue 3, No 5, 415-441

Abstract: Abstract Option-implied volatilities are widely used to examine the dynamics of uncertainty in global markets. This study aims to investigate how the reserve currency (US dollar) influences the time-varying relationship between uncertainties (implied volatilities) in commodity markets (oil and gold markets) and financial markets (currency and stock markets). For robustness, we also control for other risk factors such as financial stress, monetary circumstances, economic policy uncertainty, and business cycle dynamics. To this end, we first derive the dynamic conditional correlations between the uncertainties in oil, gold, stock, and currency markets. We then use the autoregressive distributed lag model to explore the influence of US dollar appreciations on the dynamic conditional correlations between these uncertainties. Our baseline findings demonstrate that US dollar appreciations are the main factor in intensifying the dynamic conditional correlations of the uncertainties. To ensure accuracy, we apply impulse-response analysis, which validates the findings of our analysis. We observe that the dynamic conditional correlations of the uncertainties exhibit a stronger reaction to a shock in the US dollar, in comparison with a shock in other risk factors. The results provide useful implications for portfolio managers. The main implication is that the increased US dollar value reduces the diversification benefits in options markets.

Keywords: Reserve currency; Implied volatility; Uncertainty in commodity markets; Dynamic conditional correlations; Uncertainty in financial markets (search for similar items in EconPapers)
JEL-codes: C50 G10 G11 G15 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11408-025-00472-x Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:fmktpm:v:39:y:2025:i:3:d:10.1007_s11408-025-00472-x

Ordering information: This journal article can be ordered from
http://www.springer. ... nt/journal/11408/PS2

DOI: 10.1007/s11408-025-00472-x

Access Statistics for this article

Financial Markets and Portfolio Management is currently edited by Manuel Ammann

More articles in Financial Markets and Portfolio Management from Springer, Swiss Society for Financial Market Research Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().