Abstract
The links between exchange-rate movements and gold-price fluctuations have been extensively studied in earlier research using various econometric techniques. Our contribution to this research is that we apply a novel nonparametric causality-in-quantiles test to study the causal links between exchange-rate movements and gold-price fluctuations. We use daily data for the sample period 1994–2015 for major gold-producing countries to illustrate the novel test. We find that, for the majority of countries, gold-price fluctuations help to predict in sample the returns and the volatility of exchange rates. While exchange-rate movements predict in sample gold volatility, they do not predict gold returns.
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Notes
The differences, which arise from using the estimated indicator function in Eq. (7), between the ideal test statistic \( {J}_T \) based on \( {Q}_{\theta}\left({Y}_{t-1}\right) \) and the feasible test statistic \( {\widehat{J}}_T \) given in Eq. (10) follow a second order degenerate U-statistic. By using the result that a second order degenerate U-statistic has an asymptotically normal distribution, Jeong et al. (2012) establish the asymptotic normality of the \( {\widehat{J}}_T \) statistic under a β -mixing process.
The SIC criterion is known to select a parsimonious number of lags and, thereby, prevents overparameterization problems associated with nonparametric approaches. Hurvich and Tsai (1989) examine the AIC and show that it is biased towards selecting an overparameterized model, while the SIC is asymptotically consistent.
We wanted to consider the top fifteen gold producers leaving out the United States (ranked third) for obvious reasons. However, Uzbekistan (ranked ninth) had to be dropped, as the Uzbekistani Som relative to the dollar is only available at annual frequency. Ranking of countries based on gold production in Kilograms can be found at http://www.indexmundi.com/minerals/?product=gold.
Details of the unit root tests are available upon request from the authors.
It is beyond the scope of our analysis to give a detailed economic explanation for why the results for Papua New Guinea are insignificant. One factor in this regard might be that an exchange-rate target zone around the official exchange rate of the kina was introduced in June 2014. The exchange-rate system can be described, according to the IMF, as a “crawl-like arrangement”. The IMF further states that the foreign exchange market in Papua New Guinea has been traditionally characterized by few suppliers, a structural shortage of foreign exchange, and a one-sided market. Moreover, fluctuations of the kina exchange rate have been caused to a non-negligible extend by large capital inflows related to the LNG project construction since 2008. See International Monetary Fund 2015 page 12-14.
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Acknowledgments
We would like to thank two anonymous referees for many helpful comments. Any remaining errors are solely ours.
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Balcilar, M., Gupta, R. & Pierdzioch, C. On exchange-rate movements and gold-price fluctuations: evidence for gold-producing countries from a nonparametric causality-in-quantiles test. Int Econ Econ Policy 14, 691–700 (2017). https://doi.org/10.1007/s10368-016-0357-z
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DOI: https://doi.org/10.1007/s10368-016-0357-z