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Gold-Oil Dependence Dynamics and the Role of Geopolitical Risks: Evidence from a Markov-Switching Time-Varying Copula Model

Aviral Tiwari, Goodness Aye (), Rangan Gupta and Konstantinos Gkillas (Gillas) ()
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Goodness Aye: Department of Economics, University of Pretoria, Pretoria, South Africa

No 201918, Working Papers from University of Pretoria, Department of Economics

Abstract: This paper examined the dependence structure and dynamics between gold and oil prices. Specifically, we examined the hedge and safe haven ability of gold for oil prices using the time-varying Markov switching copula models and daily gold prices and West Texas Intermediate Institute (WTI) crude oil spot prices from 2 January 1985 to 30 November 2017. The heterogeneity of market agents is captured by decomposing the raw original series into different multi-resolution analysis (MRA) investment horizons (D1-S9). Further, we examined the effect of geopolitical risks on the dynamic dependence between gold and oil. We provide evidence of time-varying Markov tail dependence structure and dynamics between gold and oil. While our results showed that gold is a good hedge for oil returns and for short- and medium-term investors, it cannot protect long-term investors against losses arising from increasing oil prices. We also provide evidence in support of the safe haven ability of gold for oil. Further, we show that the inclusion of geopolitical risks in a pure gold and oil asset portfolio provides diversification benefits since the former has mostly negative effect on the dependence structure between gold and oil.

Keywords: Time-Varying Dependence; Gold and Oil Markets; Copula Models; Geopolitical Risks. (search for similar items in EconPapers)
JEL-codes: C22 Q02 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2019-03
New Economics Papers: this item is included in nep-ene and nep-rmg
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Journal Article: Gold-oil dependence dynamics and the role of geopolitical risks: Evidence from a Markov-switching time-varying copula model (2020) Downloads
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