Forecasting volatility and correlation between oil and gold prices using a novel multivariate GAS model

Chen, Rongda; Xu, Jianjun

doi:10.1016/j.eneco.2018.11.011

Cited by 65 publications

(24 citation statements)

References 46 publications

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“…The research objective to look at the efficacy of gold as a good hedge against oil price risk is not arbitrary. Theoretically, it develops from an established age-long relationship between crude oil and gold [see Soytas et al, 2009 ; Narayan et al, 2010 ; Zhang and Wei, 2010 ; Ewing and Malik, 2013 ; Gil-Alana et al, 2017 ; Bildirici and Sonustun, 2018 ; Bedoui et al, 2019 ; Chen and Xu, 2019 ] as the two biggest, commonly traded assets in the global financial/commodity markets. From the perspective of investors, when oil price risks increase financial markets’ uncertainty as argued earlier during the pandemic, it is incumbent on investors to seek protection in gold as against other assets that contribute to spiral in financial contagions like oil, cryptocurrencies, and stocks [see Yaya et al, 2016 ; Corbet et al, 2020 ; Conlon et al, 2020 ].…”

Section: Motivationmentioning

confidence: 99%

“…The theoretical construction for linking the crude oil and gold markets has been argued to stem from the age-long connection between the crude oil and gold markets, and the gold and oil prices – both having global effects on the macroeconomic fundamentals of wide-ranging countries [see Soytas et al, 2009 ; Narayan et al, 2010 ; Zhang and Wei, 2010 ; Ewing and Malik, 2013 ; Gil-Alana et al, 2017 ; Bildirici and Sonustun, 2018 ; Bedoui et al, 2019 ; Chen and Xu, 2019 ]. Crude oil is a major source of energy globally and is therefore shown to significantly influence global macroeconomic dynamics, including economic growth, inflation, and stock market fundamentals of many countries [see Aguilera and Radetzki, 2017 ; Ansari and Sensarma, 2019 ].…”

Section: The Link Between Gold and Crude Oil Markets: Some Highlightsmentioning

confidence: 99%

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Hedging oil price risk with gold during COVID-19 pandemic

2021

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This paper assesses the role of gold as a safe haven or hedge against crude oil price risks. We employ the asymmetric VARMA-GARCH model, using daily data from January 2016 to August 2020. To account for the impact of COVID-19 pandemic, we partitioned the data into two to reflect the periods before and during the pandemic. Our empirical results find gold as a significant safe haven against oil price risks. The optimal portfolio and hedging analyses conducted also validate the hedging effectiveness of gold against risk associated with oil. The robustness of our results is further confirmed using three other prominent precious metals - silver, platinum, and palladium. In sum, our results are useful for investors and portfolio managers that are desirous of using gold and other precious metals as portfolio rebalancing tools to minimize or circumvent risks associated with volatile oil returns.

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Section: Motivationmentioning

confidence: 99%

Section: The Link Between Gold and Crude Oil Markets: Some Highlightsmentioning

confidence: 99%

Hedging oil price risk with gold during COVID-19 pandemic

2021

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“…Avdulaj and Barunik (2015) apply GAS models and copula functions to forecast the conditional time‐varying joint distribution of the oil‐stock pairs, yielding statistically better results for time‐varying dependences and quantiles. Chen and Xu (2019) use a multivariate GAS model to analyze and forecast volatilities and correlations between crude oil, natural gas, and gold prices. Compared with the classical DCC‐GARCH model, the GAS approach better captures the volatility persistence and nonlinear interaction effects between crude oil and gold markets.…”

Section: Introductionmentioning

confidence: 99%

Optimal futures hedging for energy commodities: An application of the GAS model

Lien

2020

Journal of Futures Markets

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This paper applies generalized autoregressive score-driven (GAS) models to futures hedging of crude oil and natural gas. For both commodities, the GAS framework captures the marginal distributions of spot and futures returns and corresponding dynamic copula correlations. We compare within-sample and out-of-sample hedging effectiveness of GAS models against constant ordinary least square (OLS) strategy and time-varying copula-based GARCH models in terms of volatility reduction and Value at Risk reduction. We show that the constant OLS hedge ratio is not inherently inferior to the time-varying alternatives. Nonetheless, GAS models tend to exhibit better hedging effectiveness than other strategies, particularly for natural gas.

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“…Ewing and Malik [2], using univariate and bivariate generalized autoregressive conditional heteroscedasticity (GARCH) models, indicated strong evidence of significant transmission of volatility between gold and oil returns. Chen and Xu [3] showed that Brent and gold prices' dependent structure are more complex than those of West Texas Intermediate (WTI) and gold. Research on the links between oil and gold prices results, among others both of these raw materials are assigned important roles in the risk management process in financial markets [4].…”

Section: Introductionmentioning

confidence: 99%

The Impact of Implied Volatility Fluctuations on Vertical Spread Option Strategies: The Case of WTI Crude Oil Market

Łamasz¹,

Iwaszczuk²

2020

Energies

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This paper aims to analyze the impact of implied volatility on the costs, break-even points (BEPs), and the final results of the vertical spread option strategies (vertical spreads). We considered two main groups of vertical spreads: with limited and unlimited profits. The strategy with limited profits was divided into net credit spread and net debit spread. The analysis takes into account West Texas Intermediate (WTI) crude oil options listed on New York Mercantile Exchange (NYMEX) from 17 November 2008 to 15 April 2020. Our findings suggest that the unlimited vertical spreads were executed with profits less frequently than the limited vertical spreads in each of the considered categories of implied volatility. Nonetheless, the advantage of unlimited strategies was observed for substantial oil price movements (above 10%) when the rates of return on these strategies were higher than for limited strategies. With small price movements (lower than 5%), the net credit spread strategies were by far the best choice and generated profits in the widest price ranges in each category of implied volatility. This study bridges the gap between option strategies trading, implied volatility and WTI crude oil market. The obtained results may be a source of information in hedging against oil price fluctuations.

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Forecasting volatility and correlation between oil and gold prices using a novel multivariate GAS model

Cited by 65 publications

References 46 publications

Hedging oil price risk with gold during COVID-19 pandemic

Hedging oil price risk with gold during COVID-19 pandemic

Optimal futures hedging for energy commodities: An application of the GAS model

The Impact of Implied Volatility Fluctuations on Vertical Spread Option Strategies: The Case of WTI Crude Oil Market

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