Gold, Stock Price, Interest Rate and Exchange Rate Dynamics: An MS VAR Approach

Kal, Süleyman Hilmi and Arslaner, Ferhat and Arslaner, Nuran (2013): Gold, Stock Price, Interest Rate and Exchange Rate Dynamics: An MS VAR Approach. Published in: International Research Journal of Finance and Economics No. 107 (5 April 2013): pp. 8-16.

Abstract

Holding on gold as an asset has been considered a traditional safe haven for risk averse investors even though holding gold has no yield other than capital asset, especially during the volatile economic periods. Under the Breton Woods agreement the exchange rate is fixed by agreement and the price of gold has become volatile and steadily has been increasing against all of the major currencies. In this study, it is investigated that whether the relationship between gold, interest rates, exchange rates and stock market yields vary depending gold oil ratio. A two state time varying transition probability Markov switching (MS) process to the vector auto regression (VAR) estimation of macro financial variables. The switching between the states of the Markov process is linked to the volatility of gold and the macro financial variables to understand the transition dynamics between states. Results indicate that the interrelationships between the macro financial variables and gold prices are state dependent and volatilities of the variables have a statistically significant effect on the transitional dynamics of gold prices between the states.

• Item Type: MPRA Paper
• Language: English
• Keywords: Gold Price; Gold Oil Ratio; Stock Price; Interest Rates; Exchange Rates; Time Series Analysis; Markov Switching Regimes
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates

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