Global economic contraction, climate change and the gold market volatility: A GARCH‐MIDAS approach

Our paper has two main objectives. First, we aim to investigate the relationship between global economic contraction (GECON) and the return volatility of gold. Second, we examine the role of climate change as a mediator in this connection. To achieve this, we use the GARCH‐MIDAS model, which accommodates data in different frequencies in the same model. This prevents the loss of important information when aggregating high‐frequency data to lower‐frequency data. We also use alternative measures of GECON from Kilian and Zhou (Journal of International Money and Finance, 2018; 88, 54–78) and Baumeister et al. (Review of Economics and Statistics, 2020;104(4), 828–844) to ensure the robustness of our findings. Our results show that global economic contraction positively impacts the return volatility of gold. Additionally, our findings confirm that the increased uncertainty caused by climate change makes gold a safe haven for investors. This means that gold's return volatility is not negatively impacted by the rising level of uncertainty caused by climate‐induced contraction. Moreover, we note that the index of GECON that accommodates more dynamics can produce more accurate predictability for gold market volatility. Our analysis of stock market volatility further confirms that gold has a safe haven potential relative to the stock market.