Gold-oil dynamic relationship and the asymmetric role of geopolitical risks: Evidence from Bayesian pdBEKK-GARCH with regime switching. (September 2022)

• Record Type: Journal Article
• Authors: Cheng, Sheng; Han, Lingyu; Cao, Yan; Jiang, Qisheng; Liang, Ruibin
• Is Part Of: Resources policy. Volume 78(2022)
• Publication Date: 2022-09
• Subjects: Crude oil -- Gold -- Relationship -- Geopolitical risks -- Asymmetric; Mines and mineral resources -- Periodicals; Ressources minérales -- Périodiques; Ressources naturelles -- Gestion -- Périodiques; Environnement -- Politique gouvernementale -- Périodiques; 333.8
• DOI: 10.1016/j.resourpol.2022.102917
• Languages: English
• ISSNs: 0301-4207

Abstract

Abstract: The crude oil and gold markets have affected economies in various aspects and are highly sensitive to geopolitical risks. However, the literature remains understudied with studies on the relationship between the link of gold-oil and geopolitical risks. To examine nonlinear and asymmetric effects of geopolitical risks on the relationship of gold-oil, this paper first employs the Bayesian positive diagonal BEKK-GARCH model to capture the time-varying correlation between gold market and oil market. Secondly, the threshold vector error correction model (TVECM) results reveal a transmission running from geopolitical risks to the relation of gold-oil in the long run. Thirdly, our study further shows diversity in different time scales using the maximum overlap discrete wavelet transformation (MODWT) method. Specifically, the geopolitical risks volatility is affected by the gold-oil in the short term and gradually becomes independent in the medium-long term. Finally, we find that geopolitical risks play a dominant role in the extreme regime. These findings are of great significance for investors with different horizons to understand the relation of gold-oil markets under the impact of the geopolitical risks and to make suitable diversification of portfolios. Highlights: The relationship of crude oil prices and gold prices are analyzed employing Bayesian positive diagonal BEKK-GARCH model. The effects of geopolitical risks on the relation of gold-oil are diversified different time scales. A non-linear transmission running from geopolitical risks to the relation of gold-oil in the long-run. There exists bidirectional transmission between the relation of gold-oil and geopolitical risks in the short-term.