Does Oil Predict Gold? A Nonparametric Causality-in-Quantiles Approach

Shahbaz, Muhammad and Balcilar, Mehmet and Ozdemir, Zeynel Abidin (2017): Does Oil Predict Gold? A Nonparametric Causality-in-Quantiles Approach.

Abstract

This paper examines the predictive power of oil price for gold price using the novel nonparametric causality-in-quantiles testing approach. The study uses weekly data over the April 1983-August 2016 period for both the spot and 1-month to 12-month futures markets. The new approach, the causality-in-quantile, allows one to test for causality-in-mean and causality-in-variance when there may be no causality in the first moment but higher order interdependencies may exist. The tests are preferred over the linear Granger causality test that might be subject to misleading results due to misspecification. Contrary to no predictability results obtained under misspecified linear structure, the nonparametric causality-in-quantiles test shows that oil price has a weak predictive power for the gold price. Moreover, the causality-in-variance tests obtain strong support for the predictive capacity of oil for gold market volatility. The results underline the importance of accounting for nonlinearity in the analysis of causality from oil to gold.

• Item Type: MPRA Paper
• Language: English
• Keywords: Gold, Oil, Spot and futures markets; Quantile Causality
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models

References

Abhyankar, A., Xu, B., Wang, J., 2013. Oil price shocks and the stock market: Evidence from Japan. Energy Journal 34, 199–222.

Abdelaziz, M., Chortareas, G., Cipollini, A., 2008. Stock prices, exchange rates, and oil: evidence from middle east oil-exporting countries. Soc. Sci. Res. Netw. 44, 1–27.

Arouri, M.E.H., Lahiani, A., Nguyen, D.K., 2015. World gold prices and stock returns in China: insights for hedging and diversification strategies. Econ. Model. 44, 273–282.

Asteriou, D., Bashmakova, Y., 2013. Assessing the impact of oil returns on emerging stock markets: a panel data approach for ten Central and Eastern European Countries. Energy Econ. 38, 204–211.

Awokuse, T.O., Yang, J., 2003. The information role of commodity prices in formulating monetary policy: a re-examination. Econ. Lett. 79, 219–224.

Balcilar, M., Gupta, R., Pierdzioch, C., 2016a. Does uncertainty move the gold price? New evidence from a nonparametric causality-in-quantiles test. Resources Policy 49, 74-80.

Balcilar, M., Bekiros, S., Gupta, R., 2016b. The role of news-based uncertainty indices in predicting oil markets: a hybrid nonparametric quantile causality method. Empirical Economics, forthcoming. DOI: 10.1007/s00181-016-1150-0.

Bampinas, G., Panagiotidis, T., 2015. On the relationship between oil and gold before and after financial crisis: linear, nonlinear and time-varying causality testing. Studies in Nonlinear Dynamics & Econometrics 19, 657-668.

Barisheff, N. (2005). The gold, oil and us dollar relationship. http://www.kitco.com/ind/barisheff/apr222005.html, accessed on 2016-2-1.

Basher, S.A., Sadorsky, P., 2006. Oil price risk and emerging stock markets. Glob. Financ. J. 17, 224–251.

Beckmann, J., Czudaj, R., 2013. Oil and gold price dynamics in a multivariate coin- tegration framework. Int. Econ. Econ. Policy 10, 453–468.

Beckmann, J., Czudaj, R., Pilbeam, K., 2015. Causality and volatility patterns between gold prices and exchange rates. N. Am. J. Econ. Financ. 34, 292–300.

Bhunia, A., 2013. Cointegration and causal relationship among crude price, do- mestic gold price and financial variables: an evidence of BSE and NSE. J. Con- temp. Issues Bus. Res. 2 (1), 01–10.

Broadstock, D.C., Filis, G., 2014. Oil price shocks and stock market returns: New evidence from the United States and China. J. Int. Financ. Mark. Inst. Money 33, 417–433.

Capie, F., Mills, T.C., Wood, G., 2005. Gold as a hedge against the dollar. J. Int. Financ. Mark. Inst. Money 15, 343–352.

Chang, H.F., Huang, L.C., Chin, M.C., 2013. Interactive relationships between crude oil prices, gold prices, and the NT–US dollar exchange rate—a Taiwan study. Energy Policy 63, 441–448.

Christiano, L.J., Eichenbaum, M., Evans, C., 1996. The effects of monetary policy shocks: evidence from the flow of funds. Rev. Econ. Stat. 78, 16–34.

Cologni, A., Manera, M., 2008. Oil prices, inflation and interest rates in a structural cointegrated VAR model for the G-7 countries. Energy Econ. 30, 856–888.

Cong, R.G., Wei, Y.M., Jiao, J.L., Fan, Y., 2008. Relationships between oil price shocks and stock market: an empirical analysis from China. Energy Policy 36, 3544–3553.

Cunado, J., Perez de Gracia, F., 2003. Do oil price shocks matter? Evidence for some european countries. Energy Econ. 25, 137–154.

Cunado, J., Perez de Gracia, F., 2005. Oil prices, economic activity and inflation: evidence for some asian countries. Q. Rev. Econ. Financ. 45, 65–83.

Cunado, J., de Gracia, F.P., 2014. Oil price shocks and stock market returns: evidence for some European countries. Energy Econ. 42, 365–377.

Degiannakis, S., Filis, G., Kizys, R., 2014. The effects of oil price shocks on stock market volatility: evidence from European data. Energy J. 35 (1), 35–56.

Diks C., Panchenko, V., 2006. A new statistic and practical guidelines for nonparametric Granger causality testing. Journal of Economic Dynamics & Control 30, 1647–1669.

Hammoudeh, S., Yuan, Y., 2008. Metal volatility in presence of oil and interest rate stocks. Energy Econ. 30, 606–620.

Hussin, M.Y.M., Muhammad, F., Razak, A.A., Tha, G.P., Marwan, N., 2013. The link between gold price, oil price and islamic stock market: experience from Ma- laysia. J. Stud. Soc. Sci. 4, 2.

Ghosh, S., 2011. Examining crude oil price-exchange rate nexus for India during the period of extreme oil price volatility. Appl. Energy 88, 1886–1889.

Ghosh, S., Kanjilal, K., 2016. Co-movement of international crude oil price and Indian stock market: Evidences from nonlinear cointegration tests. Energy Economics 53, 111–117.

Hooker, M.A., 2002. Are oil shocks inflationary? Asymmetric and nonlinear specifications versus changes in regime. Journal of Money Credit and Banking 34, 540–561.

Hunt, B., 2006. Oil price shocks and the US stagflation of the 1970s: some insights from GEM. Energy Journal 27, 61–80.

Hiemstra, C., Jones, J., 1994. Testing for linear and nonlinear Granger causality in the stock price-volume relation. J. Finance 49, 1639–1664.

Hurvich, C. M., Tsai, C.-L., 1989. Regression and Time Series Model Selection in Small Samples. Biometrika 76, 297–307.

Jeong, K., Härdle, W.K., Song, S., 2012. A consistent nonparametric test for causality in quantile. Econom Theory 28, 861–887.

Kim, M.H., Dilts, D.A., 2011. The relationship of the value of the dollar, and the prices of gold and oil: a tale of asset risk. Econ. Bull. 31, 1151–1162.

Kilian, L., 2009. Not all oil price shocks are alike: Disentangling demand and supply shocks in the crude oil market. American Economic Review 99, 1053.

Kilian, L., Park, C., 2009. The impact of Oil Price shocks on the US stock market. Int. Econ. Rev. 50, 1267–1287.

Le, T., Chang, Y., 2011. Oil and Gold: Correlation or Causation? DEPOCEN Working Paper Series No. 22.2.

Lee, Y., Huang, Y., Yang, H., 2012. The asymmetric long-run relationship between crude oil and gold futures. Glob. J. Bus. Res. 6, 9–15.

Li, Q. and J.S. Racine (2004), “Cross-validated local linear nonparametric regression,” Statistica Sinica 14, 485-512.

Liao, S.J, Chen, J.T., 2008. The relationship among oil prices, gold prices and individual industrial sub indices in Thaiwan. Working Paper Presented at International Conference on Business and Information. Seoul, South Korea.

Melvin, M., Sultan, J., 1990. South African political unrest, oil prices, and the time varying risk premium in the fold futures market. Journal of Futures Markets 10, 103–111.

Mishra, A., 2004. Stock market and foreign exchange market in India: are they related? South Asia Econ. J. 5 (2), 209–232.

Mollick, A.V., Assefa, T.A., 2013. US stock returns and oil prices: the tale from daily data and the 2008–2009 financial crisis. Energy Econ. 36, 1–18.

Narayan, P.K., Narayan, S., Zheng, X., 2010. Gold and oil futures markets, are markets efficient? Applied Energy 87, 3299–3303.

Nishiyama, Y., Hitomi, K., Kawasaki, Y., and Jeong, K., (2011). A consistent nonparametric Test for nonlinear causality - specification in time series regression. Journal of Econometrics 165, 112-127.

Park, J., Ratti, R., 2008. Oil prices shocks and stock markets in the U.S. and 13 European countries. Energy Econ. 30, 2587–2608.

Patel, S.A., 2013. Causal relationship between stock market indices and gold price: evidence from India. IUP J. Appl. Financ. 19, 99.

Pierdzioch, C., Risse, M., Rohloff, S., 2015. Fluctuations of the real exchange rate, real interest rates, and the dynamics of the price of gold in a small open economy. Empir. Econ., 1–19.

Racine, J.S., Li, Q., 2004. Nonparametric estimation of regression functions with both categorical and continuous data. Journal of Econometrics 119, 99-130. Reboredo, J. C., 2013. Is gold a safe haven or a hedge for the US dollar? Implications for risk management. Journal of Banking & Finance 37, 2665-2676.

Reboredo, J.C., Rivera-Castro, M.A., 2014. Gold and exchange rates: downside risk and hedging at different investment horizons. Int. Rev. Econ. Financ. 34, 267–279.

Sari, R., Hammoudeh, S., Ewing, B.T., 2007. Dynamic relationships between oil and metal commodity futures prices. Geopolit. Energy 29, 2–13.

Sari, R., Hammoudeh, S., Soytas, U., 2010. Dynamics of oil price, precious metal prices, and exchange rate. Energy Economics 32, 351–362.

Simakova, J., 2011. Analysis of the relationships between oil and gold price. J. Financ. 51 (1), 651–662.

Sjaastad, L.A., 2008. The price of gold and the exchange rates: once again. Resour. Policy 33, 118–124.

Soytas, U., Sari, R., Hammoudeh, S., Hacihasanoglu, E., 2009. World oil prices, precious metal prices and macroeconomy in Turkey. Energy Policy 37, 5557–5566.

Tiwari, A.K., Sahadudheen, I., 2015. Understanding the nexus between oil and gold. Resour. Policy 46, 85-91.

Zhang, Yue-Jun, Wei, Yi-Ming, 2010. The crude oil market and the gold market: evidence for cointegration, causality and price discovery. Resour. Policy 35, 168–177.

Wang, Y.S., Chueh, Y.L., 2013. Dynamic transmission effects between the interest rate, the US dollar, and gold and crude oil prices. Econ. Model. 30, 792–798.