A regime-dependent assessment of the information transmission dynamics between oil prices, precious metal prices and exchange rates

Abstract

We use the Bayesian Markov-switching vector error correction (MS-VEC) model and the regime-dependent impulse response functions (RDIRFs) to examine the transmission dynamics between oil spot prices, precious metals (gold, silver, platinum, and palladium) spot prices and the US dollar/euro exchange rate. Using daily data from 1987 to 2012, two regimes (low and high volatility regimes) appear to be prevalent for this system. We find evidence that among the five commodity prices the gold prices are the most informative in the group in the high volatility regime, while gold, palladium, and platinum are the most informative in the low volatility regime. Though the platinum and palladium prices impact each other, the impacts in the high volatility regime are asymmetric. In addition to its low correlation in the group, palladium's negative impact on the exchange rate and gold makes it a reliable hedge asset for investors. Gold is the least volatile variable, thus affirming its use as a safe haven asset, while silver and oil are the most volatile in the group. Understanding the dynamics of these commodity prices should help investors decide how to invest during periods of low vs. highly volatile regimes. (C) 2015 Elsevier Inc. All rights reserved.