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The yen for gold

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Author Info

  • Wang, Kuan-Min
  • Lee, Yuan-Ming

Abstract

In this article, we examine whether gold could be an exchange rate hedge in Japan, using data from 1986 to 2007. In the literature on this area, most research focuses on the linear relationship--rather than the non-linear one--between gold returns and the exchange rate fluctuation of the Japanese yen. In the present paper, we use the depreciation rate of the yen as a threshold variable to distinguish between a high depreciation regime and a low depreciation (or appreciation) regime. With this specification, we build a threshold vector autoregressive model to investigate the causality between the gold return and the yen depreciation rate. We find that when the yen depreciation rate is greater than 2.62%, investing in gold could avoid the depreciation loss. Therefore, we conclude that the effectiveness of gold as an exchange rate hedge depends on the depreciation rate of the yen. This finding could benefit both the Japanese monetary authority and investors who hold Japanese yen in their portfolios.

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Bibliographic Info

Article provided by Elsevier in its journal Resources Policy.

Volume (Year): 36 (2011)
Issue (Month): 1 (March)
Pages: 39-48

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Handle: RePEc:eee:jrpoli:v:36:y:2011:i:1:p:39-48

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Web page: http://www.elsevier.com/locate/inca/30467

Related research

Keywords: Gold return Exchange rate hedge Threshold model Asymmetric causality;

References

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  1. Kyrtsou, Catherine & Labys, Walter C., 2006. "Evidence for chaotic dependence between US inflation and commodity prices," Journal of Macroeconomics, Elsevier, vol. 28(1), pages 256-266, March.
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  4. Dipak Ghosh & Eric J. Levin & Peter Macmillan & Robert E. Wright, 2000. "Gold as an Inflation Hedge?," Discussion Paper Series, Department of Economics 200021, Department of Economics, University of St. Andrews.
  5. Clements, Kenneth W. & Fry, Renée, 2008. "Commodity currencies and currency commodities," Resources Policy, Elsevier, vol. 33(2), pages 55-73, June.
  6. Larry A. Sjaastad, 2007. "The Price of Gold and the Exchange Rates: Once Again," Economics Discussion / Working Papers 07-20, The University of Western Australia, Department of Economics.
  7. Robert D. Laurent, 1994. "Is there a role for gold in monetary policy?," Economic Perspectives, Federal Reserve Bank of Chicago, issue Mar, pages 2-14.
  8. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  9. Capie, Forrest & Mills, Terence C. & Wood, Geoffrey, 2005. "Gold as a hedge against the dollar," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 15(4), pages 343-352, October.
  10. Chappell, David & Dowd, Kevin, 1997. "A Simple Model of the Gold Standard," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 94-105, February.
  11. Sjaastad, Larry A. & Scacciavillani, Fabio, 1996. "The price of gold and the exchange rate," Journal of International Money and Finance, Elsevier, vol. 15(6), pages 879-897, December.
  12. Davidson, Sinclair & Faff, Robert & Hillier, David, 2003. "Gold factor exposures in international asset pricing," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 13(3), pages 271-289, July.
  13. Mahdavi, Saeid & Zhou, Su, 1997. "Gold and commodity prices as leading indicators of inflation: Tests of long-run relationship and predictive performance," Journal of Economics and Business, Elsevier, vol. 49(5), pages 475-489.
  14. Behzad T. Diba & Herschel I. Grossman, 1984. "Rational Bubbles in the Price of Gold," NBER Working Papers 1300, National Bureau of Economic Research, Inc.
  15. Neill Fortune, J., 1987. "The inflation rate of the price of gold, expected prices and interest rates," Journal of Macroeconomics, Elsevier, vol. 9(1), pages 71-82.
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Citations

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Cited by:
  1. Baur, Dirk G., 2011. "Explanatory mining for gold: Contrasting evidence from simple and multiple regressions," Resources Policy, Elsevier, vol. 36(3), pages 265-275, September.
  2. Thai-Ha Le & Youngho Chang, 2011. "Oil And Gold: Correlation Or Causation?," Working Papers 22, Development and Policies Research Center (DEPOCEN), Vietnam.
  3. Beckmann, Joscha & Czudaj, Robert, 2013. "Gold as an inflation hedge in a time-varying coefficient framework," The North American Journal of Economics and Finance, Elsevier, vol. 24(C), pages 208-222.
  4. Reboredo, Juan C., 2013. "Is gold a safe haven or a hedge for the US dollar? Implications for risk management," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2665-2676.
  5. Wang, Kuan-Min & Lee, Yuan-Ming & Thi, Thanh-Binh Nguyen, 2011. "Time and place where gold acts as an inflation hedge: An application of long-run and short-run threshold model," Economic Modelling, Elsevier, vol. 28(3), pages 806-819, May.
  6. Le, Thai-Ha & Chang, Youngho, 2011. "Dynamic relationships between the price of oil, gold and financial variables in Japan: a bounds testing approach," MPRA Paper 33030, University Library of Munich, Germany.

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