Global Economic Contraction and the Gold Market : The Role of Climate Change

In this paper, we investigate the connection between global economic contraction using two different measures, and the return volatility of gold while the GARCH-MIDAS framework is utilized. The utilization of this framework is hinged on its accommodation of data in different frequencies in the same model thereby preventing possible loss of salient information to aggregating high-frequency data to lower-frequency one. In essence, for the main results, we utilize the global economic contraction measure by Baumeister et al. (2020) which includes world industrial production in its measure, while that of Kilian and Zhou (2018) is used for additional analysis. We deviate from what is obtainable in the existing literature by examining the role of climate change in the nexus. Overall, we find that global economic contraction has a positive impact on the return volatility of gold and that the increased uncertainty created by climate change makes gold to be a safe haven for investors. In other words, gold return volatility is not negatively impacted by the rising level of uncertainty caused by climate-induced contraction, thus confirming the safe haven quality of gold during a turbulent time. When the contraction measure by Kilian and Zhou (2018) is utilized, we document the same result as the former index, showing the robustness of our result to alternative measures of global economic contraction. However, in the face of climate change, Baumeister et al. (2020) index performs better. This is also the case when the behaviour of stock return volatility is examined for possible different results