Gold-oil dependence dynamics and the role of geopolitical risks: Evidence from a Markov-switching time-varying copula model

摘要

This paper examines the dependence structure and dynamics between gold and oil prices. Specifically, we study the hedge and safe haven ability of gold for oil prices using daily gold prices and West Texas Intermediate Institute (WTI) crude oil spot prices. To this end, we employ time-varying Markov switching copula models. The period of the analysis spans from 2 January 1985 to 30 November 2017. The heterogeneity of market agents is captured by decomposing the raw original series into different multi-resolution analysis (MRA) investment horizons (D1-S9). Furthermore, we examine the effect of geopolitical risks on the dynamic dependence between gold and oil. We provide evidence of time-varying Markov tail dependence structure and dynamics between gold and oil. While our results show that gold is a good hedge for oil returns, and for short- and medium-term investors, it cannot protect long-term investors against losses arising from increasing oil prices. We also provide evidence in support of the safe haven ability of gold for oil. Moreover, we show that the inclusion of geopolitical risks in a pure gold and oil asset portfolio provides diversification benefits, since the former has mostly a negative effect on the dependence structure between gold and oil. (C) 2020 Elsevier B.V. All rights reserved.