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How Strong is the Relationship Among Gold and USD Exchange Rates? Analytics Based on Structural Change Models

Author

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  • Manh Cuong Dong

    (Feng Chia University)

  • Cathy W. S. Chen

    (Feng Chia University)

  • Sangyoel Lee

    (Seoul National University)

  • Songsak Sriboonchitta

    (Chiang Mai University)

Abstract

This study examines the dynamic relationship among gold and USD exchange rates. Since one single time series model can suffer from structural (or parameter) changes in underlying models, we consider those models with structural breaks. We first employ the cumulative sum of squared residual test to determine the number and locations of change points in the volatility of time series and then divide the whole period by the change points to investigate the relationship between gold and USD exchange rates in each sub-period, based on the time-varying correlations obtained from dynamic conditional correlation models. We show that a negative correlation exists in almost all periods and that the correlation coefficients have higher absolute values during the global financial crisis period than in other periods. Furthermore, the correlation becomes much greater along with downside moves of USD versus upside moves, indicating that a depreciating trend of USD typically has more influence on gold than an appreciating trend. This phenomenon is in line with the leverage effect in financial markets. After comparing the two methods of with/without structural changes, our findings from an empirical study provide evidence that ignoring structural changes can lead to a false conclusion and confirm that our method offers a functional tool to analyze gold prices and USD exchange rates.

Suggested Citation

  • Manh Cuong Dong & Cathy W. S. Chen & Sangyoel Lee & Songsak Sriboonchitta, 2019. "How Strong is the Relationship Among Gold and USD Exchange Rates? Analytics Based on Structural Change Models," Computational Economics, Springer;Society for Computational Economics, vol. 53(1), pages 343-366, January.
    • Handle: RePEc:kap:compec:v:53:y:2019:i:1:d:10.1007_s10614-017-9743-z
    DOI: 10.1007/s10614-017-9743-z
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    Cited by:

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    2. Tanin, Tauhidul Islam & Sarker, Ashutosh & Brooks, Robert, 2021. "Do currency exchange rates impact gold prices? New evidence from the ongoing COVID-19 period," International Review of Financial Analysis, Elsevier, vol. 77(C).
    3. Cathy W. S. Chen & Bonny Lee, 2021. "Bayesian inference of multiple structural change models with asymmetric GARCH errors," Statistical Methods & Applications, Springer;Società Italiana di Statistica, vol. 30(3), pages 1053-1078, September.
    4. Awatef Ourir & Elie Bouri & Essahbi Essaadi, 2023. "Hedging the Risks of MENA Stock Markets with Gold: Evidence from the Spectral Approach," Computational Economics, Springer;Society for Computational Economics, vol. 61(1), pages 197-231, January.
    5. Sahu, Pritish Kumar & Bal, Debi Prasad & Kundu, Pradip, 2022. "Gold price and exchange rate in pre and during Covid-19 period in India: Modelling dependence using copulas," Resources Policy, Elsevier, vol. 79(C).

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    More about this item

    Keywords

    Leverage effect; CUSUM test; Dynamic conditional correlation; Multivariate GARCH model; Time-varying correlation; Structural breaks;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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