The crude oil market and the gold market: Evidence for cointegration, causality and price discovery

Yue-Jun Zhang () and Yi-Ming Wei

No 5, CEEP-BIT Working Papers from Center for Energy and Environmental Policy Research (CEEP), Beijing Institute of Technology

Abstract: Given that the gold market and the crude oil market are the main representatives of the large commodity markets, it is of crucial practical significance to analyze their cointegration relationship and causality, and investigate their respective contribution, from the perspective of price discovery, to the common price trend so as to interpret the dynamics of the whole large commodity market and forecast the fluctuation of crude oil and gold prices. Empirical analysis indicates that, firstly, there are consistent trends between the crude oil price and the gold price with significant positive correlation coefficient 0.9295 during the sampling period, from January of 2000 to March of 2008. Secondly, there can be seen a long-term equilibrium between the two markets, and the crude oil price change linearly Granger causes the volatility of gold price, but not vice versa; moreover, the two market prices do not face a significant nonlinear Granger causality, which overall suggests their fairly direct interactive mechanism. Finally, with regard to the common effective price between the two markets, the contribution of the crude oil price seems larger than that of the gold price, whether with the Permanent Transitory (PT) model (86.50% versus 13.50%) or the Information Share (IS) model (50.28% versus 49.72%), which implies that the influence of crude oil on global economic development proves more far-reaching and extensive, and its role in the large commodity markets has attracted more attention in recent years.

Keywords: Crude oil market; Gold market; Granger causality; Permanent Transitory model; Information Share model; Price discovery (search for similar items in EconPapers)
JEL-codes: Q43 Q58 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2009-10
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: The crude oil market and the gold market: Evidence for cointegration, causality and price discovery (2010)
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