On the relationship between the prices of oil and the precious metals: Revisiting with a multivariate regime-switching decision tree
This study examines the volatility and correlation and their relationships among the euro/US dollar exchange rates, the S&P500 equity indices, and the prices of WTI crude oil and the precious metals (gold, silver, and platinum) over the period 2005 to 2012. Our model links the univariate volatilities with the correlations via a hidden stochastic decision tree. The ensuing Hidden Markov Decision Tree (HMDT) model is in fact an extension of the Hidden Markov Model (HMM) introduced by Jordan et al. (1997). The architecture of this model is the opposite that of the classical deterministic approach based on a binary decision tree and, it allows a probabilistic vision of the relationship between univariate volatility and correlation. Our results are categorized into three groups, namely (1) exchange rates and oil, (2) S&P500 indices, and (3) precious metals. A switching dynamics is seen to characterize the volatilities, while, in the case of the correlations, the series switch from one regime to another, this movement touching a peak during the period of the Subprime crisis in the US, and again during the days following the Tohoku earthquake in Japan. Our findings show that the relationships between volatility and correlation are dependent upon the nature of the series considered, sometimes corresponding to those found in econometric studies, according to which correlation increases in bear markets, at other times differing from them.
|Date of creation:||17 Apr 2014|
|Date of revision:|
|Note:||View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00980125|
|Contact details of provider:|| Web page: http://hal.archives-ouvertes.fr/|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Andrew Ang & Geert Bekaert, 2002. "International Asset Allocation With Regime Shifts," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1137-1187.
- Roache, Shaun K. & Rossi, Marco, 2010. "The effects of economic news on commodity prices," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(3), pages 377-385, August.
- Bollerslev, Tim, 1986.
"Generalized autoregressive conditional heteroskedasticity,"
Journal of Econometrics,
Elsevier, vol. 31(3), pages 307-327, April.
- Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
- Chen, Mei-Hsiu, 2010. "Understanding world metals prices--Returns, volatility and diversification," Resources Policy, Elsevier, vol. 35(3), pages 127-140, September.
- Ang, Andrew & Chen, Joseph, 2002. "Asymmetric correlations of equity portfolios," Journal of Financial Economics, Elsevier, vol. 63(3), pages 443-494, March.
- Zhang, Yue-Jun & Wei, Yi-Ming, 2010.
"The crude oil market and the gold market: Evidence for cointegration, causality and price discovery,"
Elsevier, vol. 35(3), pages 168-177, September.
- Yue-Jun Zhang & Yi-Ming Wei, 2009. "The crude oil market and the gold market: Evidence for cointegration, causality and price discovery," CEEP-BIT Working Papers 5, Center for Energy and Environmental Policy Research (CEEP), Beijing Institute of Technology.
- Haas, Markus & Mittnik, Stefan, 2008. "Multivariate regimeswitching GARCH with an application to international stock markets," CFS Working Paper Series 2008/08, Center for Financial Studies (CFS).
- Dueker, Michael J, 1997.
"Markov Switching in GARCH Processes and Mean-Reverting Stock-Market Volatility,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 15(1), pages 26-34, January.
- Michael Dueker, 1995. "Markov switching in GARCH processes and mean reverting stock market volatility," Working Papers 1994-015, Federal Reserve Bank of St. Louis.
- Tom Doan, . "RATS programs to replicate Dueker(1997) Markov switching GARCH models," Statistical Software Components RTZ00048, Boston College Department of Economics.
- Deb, Partha & Trivedi, Pravin K & Varangis, Panayotis, 1996. "The Excess Co-movement of Commodity Prices Reconsidered," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(3), pages 275-91, May-June.
- Engle, Robert F & Sheppard, Kevin K, 2001.
"Theoretical and Empirical Properties of Dynamic Conditional Correlation Multivariate GARCH,"
University of California at San Diego, Economics Working Paper Series
qt5s2218dp, Department of Economics, UC San Diego.
- Robert F. Engle & Kevin Sheppard, 2001. "Theoretical and Empirical properties of Dynamic Conditional Correlation Multivariate GARCH," NBER Working Papers 8554, National Bureau of Economic Research, Inc.
- Batten, Jonathan A. & Ciner, Cetin & Lucey, Brian M., 2010.
"The macroeconomic determinants of volatility in precious metals markets,"
Elsevier, vol. 35(2), pages 65-71, June.
- Jonathan A. Batten, Cetin Ciner and Brian M. Lucey, 2008. "The Macroeconomic Determinants of Volatility in Precious Metals Markets," The Institute for International Integration Studies Discussion Paper Series iiisdp255, IIIS.
- Adrian W. Throop, 1993. "A generalized uncovered interest parity model of exchange rates," Economic Review, Federal Reserve Bank of San Francisco, pages 3-16.
- Plourde, André & Watkins, G. C., 1998. "Crude oil prices between 1985 and 1994: how volatile in relation to other commodities?," Resource and Energy Economics, Elsevier, vol. 20(3), pages 245-262, September.
- Markus Haas, 2004. "A New Approach to Markov-Switching GARCH Models," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 2(4), pages 493-530.
- Cheung, Yin-Wong & Lai, Kon S, 1993. "Do Gold Market Returns Have Long Memory?," The Financial Review, Eastern Finance Association, vol. 28(2), pages 181-202, May.
- Denis Pelletier, 2004.
"Regime Switching for Dynamic Correlations,"
Econometric Society 2004 North American Summer Meetings
230, Econometric Society.
- Nomikos, Nikos K. & Pouliasis, Panos K., 2011. "Forecasting petroleum futures markets volatility: The role of regimes and market conditions," Energy Economics, Elsevier, vol. 33(2), pages 321-337, March.
- Mohamed El Hedi Arouri & Shawkat Hammoudeh & Amine Lahiani & Duc Khuong Nguyen, 2013. "Long memory and structural breaks in modeling the return and volatility dynamics of precious metals," Working Papers hal-00798033, HAL.
- Brian Lucey & Edel Tully, 2005.
"Seasonality, Risk And Return In Daily COMEX Gold And Silver Data 1982-2002,"
The Institute for International Integration Studies Discussion Paper Series
- Brian Lucey & Edel Tully, 2006. "Seasonality, risk and return in daily COMEX gold and silver data 1982-2002," Applied Financial Economics, Taylor & Francis Journals, vol. 16(4), pages 319-333.
- Brian M. Lucey & Edel Tully, 2006. "The evolving relationship between gold and silver 1978--2002: evidence from a dynamic cointegration analysis: a note," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 2(1), pages 47-53, January.
- Virginie Coudert & Valérie Mignon & Alexis Penot, 2008. "Oil Price and the Dollar," Post-Print halshs-00353404, HAL.
- Asger Lunde & Peter Reinhard Hansen, 2001.
"A Forecast Comparison of Volatility Models: Does Anything Beat a GARCH(1,1)?,"
2001-04, Brown University, Department of Economics.
- Asger Lunde & Peter R. Hansen, 2005. "A forecast comparison of volatility models: does anything beat a GARCH(1,1)?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(7), pages 873-889.
- James D. Hamilton, 2009.
"Causes and Consequences of the Oil Shock of 2007-08,"
Brookings Papers on Economic Activity,
Economic Studies Program, The Brookings Institution, vol. 40(1 (Spring), pages 215-283.
- James D. Hamilton, 2010. "Causes and consequences of the oil shock of 2007–08," CQER Working Paper 2009-02, Federal Reserve Bank of Atlanta.
- James D. Hamilton, 2009. "Causes and Consequences of the Oil Shock of 2007-08," NBER Working Papers 15002, National Bureau of Economic Research, Inc.
- Diebold, Francis X. & Inoue, Atsushi, 2001.
"Long memory and regime switching,"
Journal of Econometrics,
Elsevier, vol. 105(1), pages 131-159, November.
- Franc Klaassen, 2002. "Improving GARCH volatility forecasts with regime-switching GARCH," Empirical Economics, Springer, vol. 27(2), pages 363-394.
- Agnolucci, Paolo, 2009. "Volatility in crude oil futures: A comparison of the predictive ability of GARCH and implied volatility models," Energy Economics, Elsevier, vol. 31(2), pages 316-321, March.
- Kang, Sang Hoon & Kang, Sang-Mok & Yoon, Seong-Min, 2009. "Forecasting volatility of crude oil markets," Energy Economics, Elsevier, vol. 31(1), pages 119-125, January.
- Pindyck, Robert S & Rotemberg, Julio J, 1990.
"The Excess Co-movement of Commodity Prices,"
Royal Economic Society, vol. 100(403), pages 1173-89, December.
- Pindyck, Robert S. & Rotemberg, Julio., 1987. "The excess co-movement of commodity prices," Working papers 1969-87., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Robert S. Pindyck & Julio J. Rotemberg, 1988. "The Excess Co-Movement of Commodity Prices," NBER Working Papers 2671, National Bureau of Economic Research, Inc.
- Golub, Stephen S, 1983. "Oil Prices and Exchange Rates," Economic Journal, Royal Economic Society, vol. 93(371), pages 576-93, September.
- van Amano, Robert A & Norden, Simon, 1998.
"Exchange Rates and Oil Prices,"
Review of International Economics,
Wiley Blackwell, vol. 6(4), pages 683-94, November.
- Ciner, Cetin & Gurdgiev, Constantin & Lucey, Brian M., 2013. "Hedges and safe havens: An examination of stocks, bonds, gold, oil and exchange rates," International Review of Financial Analysis, Elsevier, vol. 29(C), pages 202-211.
- Schwartz, Eduardo S, 1997. " The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-73, July.
- Baffes, John, 2007.
"Oil spills on other commodities,"
Policy Research Working Paper Series
4333, The World Bank.
- Sari, Ramazan & Hammoudeh, Shawkat & Soytas, Ugur, 2010. "Dynamics of oil price, precious metal prices, and exchange rate," Energy Economics, Elsevier, vol. 32(2), pages 351-362, March.
- Akgiray, Vedat, et al, 1991. "Conditional Dependence in Precious Metal Prices," The Financial Review, Eastern Finance Association, vol. 26(3), pages 367-86, August.
- François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, 04.
- Arouri, Mohamed El Hedi & Hammoudeh, Shawkat & Lahiani, Amine & Nguyen, Duc Khuong, 2012. "Long memory and structural breaks in modeling the return and volatility dynamics of precious metals," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(2), pages 207-218.
- Elder, John & Miao, Hong & Ramchander, Sanjay, 2012. "Impact of macroeconomic news on metal futures," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 51-65.
- Hamilton, James D. & Susmel, Raul, 1994.
"Autoregressive conditional heteroskedasticity and changes in regime,"
Journal of Econometrics,
Elsevier, vol. 64(1-2), pages 307-333.
- Tom Doan, . "RATS programs to estimate Hamilton-Susmel Markov Switching ARCH model," Statistical Software Components RTZ00083, Boston College Department of Economics.
- Wang, Yudong & Wu, Chongfeng, 2012. "Forecasting energy market volatility using GARCH models: Can multivariate models beat univariate models?," Energy Economics, Elsevier, vol. 34(6), pages 2167-2181.
- L.A. Sjaastad & F. Scacciavillani, 1995.
"The Price of Gold and the Exchange Rates,"
Economics Discussion / Working Papers
95-14, The University of Western Australia, Department of Economics.
- Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
- Christie-David, Rohan & Chaudhry, Mukesh & Koch, Timothy W., 2000. "Do macroeconomics news releases affect gold and silver prices?," Journal of Economics and Business, Elsevier, vol. 52(5), pages 405-421.
- Cheong, Chin Wen, 2009. "Modeling and forecasting crude oil markets using ARCH-type models," Energy Policy, Elsevier, vol. 37(6), pages 2346-2355, June.
- Adrangi, Bahram & Chatrath, Arjun, 2002. "The Dynamics of Palladium and Platinum Prices," Computational Economics, Society for Computational Economics, vol. 19(2), pages 179-95, April.
When requesting a correction, please mention this item's handle: RePEc:hal:wpaper:hal-00980125. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD)
If references are entirely missing, you can add them using this form.