Can gold hedge against oil price movements: Evidence from GARCH-EVT wavelet modeling

Abstract

Gold is usually regarded as having the potential to hedge or to act as a safe haven in the financial market. Does this follow onto the oil market and if so at what frequencies and to what extent? To answer this we integrate a two-stage framework to investigate the nonlinear oil-gold relationship using the GARCH-EVT-VaR model and the continuous wavelet transform. We also explore the multiscale robust economic determinants of gold's hedging intensity for oil using extreme bound analysis (EBA). The result shows that gold could hedge against oil price fluctuations across time horizons on nearly half of the occasions. The stock market is found to be the most robust determinant but the influencing strength is small. Interest rates have a strong impact on gold's hedging property but are not robust in some time scales. Further, the strength of influencing factors in short-term time horizons is relatively larger than it in long-term time horizons. Moreover, gold could also provide strong safe-haven power against the extreme oil price movements during about half of the cases. And the safe-haven capability of gold versus extreme oil prices has relatively better performance in medium-and long-term time horizons.