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

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Handbook of Financial Econometrics and Statistics

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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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Notes

  1. 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. 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. 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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Acknowledgments

This chapter was presented at the Seventh International Business Research Conference in Sydney, Australia, and the Taiwan Finance Association Annual Meeting in Taichung, Taiwan. The authors are grateful for the helpful and suggestive comments from Ken Johnson, C. L. Chiu, Ming-Chi Lee, and other participants. The authors also appreciate the financial grants for attending the conference from the National Science Council.

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Authors and Affiliations

  1. Department of Hospitality Management, Ming Dao University, Changhua Peetow, 52345, Taiwan

    Tung-Li Shih

  2. Department of International Business, Chung Yuan University, Chungli, 32023, Taiwan

    Hai-Chin Yu

  3. Department of Economics, National Taiwan University, Taipei, 100, Taiwan

    Der-Tzon Hsieh

  4. College of Business, Chung Yuan University, Chungli, 32023, Taiwan

    Chia-Ju Lee

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  1. Tung-Li Shih
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  2. Hai-Chin Yu
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  3. Der-Tzon Hsieh
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  4. Chia-Ju Lee
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Corresponding author

Correspondence to Hai-Chin Yu .

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Editors and Affiliations

  1. Department of Finance and Economics, Rutgers Business School, Rutgers, The State University of New Jersey, Piscataway, New Jersey, USA

    Cheng-Few Lee

  2. Center for PBBEF Research, North Brunswick, New Jersey, USA

    John C. Lee

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Shih, TL., Yu, HC., Hsieh, DT., Lee, CJ. (2015). Realized Distributions of Dynamic Conditional Correlation and Volatility Thresholds in the Crude Oil, Gold, and Dollar/Pound Currency Markets. In: Lee, CF., Lee, J. (eds) Handbook of Financial Econometrics and Statistics. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-7750-1_58

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

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