Threshold effects in the relationships between USD and gold futures by panel smooth transition approach
Using a Panel Smooth Transition Regression (PSTR) model, this study sets crude oil as threshold variable, and Volatility Index (VIX) and Morgan Stanley Capital International (MSCI) for Emerging Market Index (MSCI-E) as control variables to investigate the nonlinear dynamic relationship between USD/yen and gold futures in the Commodity Exchange, Inc. (COMEX). Empirical results show that the transition function is a logistic type. In region 1, the price of crude oil is low. The sign of VIX is positive. USD/yen exerts negative impact on gold market due to the way that gold market functions as a factor of hedge against portfolio and geopolitical risk. In region 2, the price of crude oil is higher (the demand for crude oil may be stronger). The economy is prosperous; VIX turns low; USD/yen increases. Investors have more money from other financial markets to buy gold, thus, causing gold futures price to rise. Besides, gold is both a hedge and a safe haven for developing countries but not for emerging countries; therefore, the relationships between gold and MSCI-E are positive in both regions.
Year of publication: |
2012
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Authors: | Lee, Wo-Chiang ; Lin, Hui-Na |
Published in: |
Applied Economics Letters. - Taylor & Francis Journals, ISSN 1350-4851. - Vol. 19.2012, 11, p. 1065-1070
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Publisher: |
Taylor & Francis Journals |
Saved in:
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