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Precious Metals-Exchange Rate Volatility Transmissions and Hedging Strategies

  • Shawkat Hammoudeh

    (Lebow College of Business, Drexel University)

  • Yuan Yuan

    (Lebow College of Business Drexel University)

  • Michael McAleer

    (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute and Center for International Research on the Japanese Economy (CIRJE), Faculty of Economics, University of Tokyo)

  • Mark A. Thompson

    (Rawls College of Business, Texas Tech University)

This study examines the conditional volatility and correlation dependency and interdependency for the four major precious metals (that is, gold, silver, platinum and palladium), while accounting for geopolitics within a multivariate system. The implications of the estimated results for portfolio designs and hedging strategies are also analyzed. The results for the four metals system show significant short-run and long-run dependencies and interdependencies to news and past volatility. These results have become more pervasive when the exchange rate and FFR are included. Monetary policy also has a differential impact on the precious metals and the exchange rate volatilities. Finally, the applications of the results show the optimal weights in a two-asset portfolio and the hedging ratios for long positions.

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File URL: http://www.carf.e.u-tokyo.ac.jp/pdf/workingpaper/fseries/193.pdf
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Paper provided by Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo in its series CARF F-Series with number CARF-F-187.

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Length: 42 pages
Date of creation: Oct 2009
Date of revision:
Handle: RePEc:cfi:fseres:cf187
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  25. Westerhoff, Frank & Reitz, Stefan, 2005. "Commodity price dynamics and the nonlinear market impact of technical traders: empirical evidence for the US corn market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 349(3), pages 641-648.
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