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Introduction to Financial Econometrics and Statistics Read chapter Read first chapter

2015 | OriginalPaper | Chapter

58. Realized Distributions of Dynamic Conditional Correlation and Volatility Thresholds in the Crude Oil, Gold, and Dollar/Pound Currency Markets

Authors : Tung-Li Shih, Hai-Chin Yu, Der-Tzon Hsieh, Chia-Ju Lee

Published in: Handbook of Financial Econometrics and Statistics

Publisher: Springer New York

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Abstract

This chapter proposes a modeling framework for the study of co-movements in price changes among crude oil, gold, and dollar/pound currencies that are conditional on volatility regimes. Methodologically, we extend the dynamic conditional correlation (DCC) multivariate GARCH model to examine the volatility and correlation dynamics depending on the variances of price returns involving a threshold structure. The results indicate that the periods of market turbulence are associated with an increase in co-movements in commodity (gold and oil) prices. By contrast, high market volatility is associated with a decrease in co-movements between gold and the dollar/pound or oil and the dollar/pound. The results imply that gold may act as a safe haven against major currencies when investors face market turmoil. By looking at different subperiods based on the estimated thresholds, we find that the investors’ behavior changes in different subperiods. Our model presents a useful tool for market participants to engage in better portfolio allocation and risk management.

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Footnotes
1
Following Andersen et al. (2001b), the authors classify the days into two groups: low volatility days and high volatility days. The empirical results show that the distribution of correlations shifts rightward when volatility increases.
 
2
Kasch and Caporin (2012) extended the multivariate GARCH dynamic conditional correlation of Engle to analyze the relationship between the volatilities and correlations. The empirical results indicated that high volatility levels significantly affect the correlations of the developed markets, while high volatility does not seem to have a direct impact on the correlations of the transition blue chip indices with the rest of the markets. It is easy to see that the volatility and correlation move together.
 
3
Guidi et al. (2007) examined the impact of relevant US decisions on oil spot price movements from January 1986 to December 2005. They identified the following conflict periods: the Iran-Iraq conflict, January 1985 until July 1988; Iraq’s invasion of Kuwait, August 1990 until February 1991; and the US-led forces’ invasion of Iraq, March 2003 until December 2005.
 
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Metadata
Title
Realized Distributions of Dynamic Conditional Correlation and Volatility Thresholds in the Crude Oil, Gold, and Dollar/Pound Currency Markets
Authors
Tung-Li Shih
Hai-Chin Yu
Der-Tzon Hsieh
Chia-Ju Lee
Copyright Year
2015
Publisher
Springer New York
Book
Handbook of Financial Econometrics and Statistics

Print ISBN: 978-1-4614-7749-5

Electronic ISBN: 978-1-4614-7750-1

Copyright Year: 2015

DOI
https://doi.org/10.1007/978-1-4614-7750-1_58