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Threshold effects in the relationships between USD and gold futures by panel smooth transition approach

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  • Wo-Chiang Lee
  • Hui-Na Lin
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    Abstract

    Using a Panel Smooth Transition Regression (PSTR) model, this study sets crude oil as threshold variable, and Volatility Index (VIX) and Morgan Stanley Capital International (MSCI) for Emerging Market Index (MSCI-E) as control variables to investigate the nonlinear dynamic relationship between USD/yen and gold futures in the Commodity Exchange, Inc. (COMEX). Empirical results show that the transition function is a logistic type. In region 1, the price of crude oil is low. The sign of VIX is positive. USD/yen exerts negative impact on gold market due to the way that gold market functions as a factor of hedge against portfolio and geopolitical risk. In region 2, the price of crude oil is higher (the demand for crude oil may be stronger). The economy is prosperous; VIX turns low; USD/yen increases. Investors have more money from other financial markets to buy gold, thus, causing gold futures price to rise. Besides, gold is both a hedge and a safe haven for developing countries but not for emerging countries; therefore, the relationships between gold and MSCI-E are positive in both regions.

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    File URL: http://hdl.handle.net/10.1080/13504851.2011.613747
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Economics Letters.

    Volume (Year): 19 (2012)
    Issue (Month): 11 (July)
    Pages: 1065-1070

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    Handle: RePEc:taf:apeclt:v:19:y:2012:i:11:p:1065-1070

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    1. Gilbert Colletaz & Christophe Hurlin, 2006. "Threshold Effects of the Public Capital Productivity : An International Panel Smooth Transition Approach," Working Papers halshs-00008056, HAL.
    2. 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.
    3. Graham Smith, 2002. "Tests of the random walk hypothesis for London gold prices," Applied Economics Letters, Taylor & Francis Journals, vol. 9(10), pages 671-674.
    4. González, Andrés & Teräsvirta, Timo & van Dijk, Dick, 2005. "Panel Smooth Transition Regression Models," Working Paper Series in Economics and Finance 604, Stockholm School of Economics.
    5. Giam Quang Do & Michael Mcaleer & Songsak Sriboonchitta, 2009. "Effects of international gold market on stock exchange volatility: evidence from asean emerging stock markets," Economics Bulletin, AccessEcon, vol. 29(2), pages 599-610.
    6. Bruce E. Hansen, 1997. "Threshold effects in non-dynamic panels: Estimation, testing and inference," Boston College Working Papers in Economics 365, Boston College Department of Economics.
    7. Dirk G. Baur & Thomas K. McDermott, . "Is gold a safe haven? International evidence," The Institute for International Integration Studies Discussion Paper Series iiisdp310, IIIS.
    8. Shawkat Hammoudeh & Ramazan Sari & Bradley T. Ewing, 2009. "Relationships Among Strategic Commodities And With Financial Variables: A New Look," Contemporary Economic Policy, Western Economic Association International, vol. 27(2), pages 251-264, 04.
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    Cited by:
    1. Joscha Beckmann & Robert Czudaj, 2013. "Oil and gold price dynamics in a multivariate cointegration framework," International Economics and Economic Policy, Springer, vol. 10(3), pages 453-468, September.

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