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Gold-oil dependence dynamics and the role of geopolitical risks: Evidence from a Markov-switching time-varying copula model

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  • Tiwari, Aviral Kumar
  • Aye, Goodness C.
  • Gupta, Rangan
  • Gkillas, Konstantinos

Abstract

This paper examines the dependence structure and dynamics between gold and oil prices. Specifically, we study the hedge and safe haven ability of gold for oil prices using daily gold prices and West Texas Intermediate Institute (WTI) crude oil spot prices. To this end, we employ time-varying Markov switching copula models. The period of the analysis spans 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). Furthermore, we examine 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 show 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. Moreover, we show that the inclusion of geopolitical risks in a pure gold and oil asset portfolio provides diversification benefits, since the former has mostly a negative effect on the dependence structure between gold and oil.

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  • Tiwari, Aviral Kumar & Aye, Goodness C. & Gupta, Rangan & Gkillas, Konstantinos, 2020. "Gold-oil dependence dynamics and the role of geopolitical risks: Evidence from a Markov-switching time-varying copula model," Energy Economics, Elsevier, vol. 88(C).
  • Handle: RePEc:eee:eneeco:v:88:y:2020:i:c:s0140988320300876
    DOI: 10.1016/j.eneco.2020.104748
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    More about this item

    Keywords

    Time-varying dependence; Gold and oil markets; Copula models; Geopolitical risks;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market

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