Continuous Wavelet Transform of Time-Frequency Analysis Technique to Capture the Dynamic Hedging Ability of Precious Metals

Abstract

Exploring the hedging ability of precious metals through a novel perspective is crucial for better investment. This investigation applies the wavelet technique to study the complicated correlation between global economic policy uncertainty (GEPU) and the prices of precious metals. The empirical outcomes suggest that GEPU exerts positive influences on the prices of precious metals, indicating that precious metals could hedge against global economic policy uncertainty, which is supported by the inter-temporal capital asset pricing model (ICAPM). Among them, gold is better for long-term investment than silver, which is more suitable for the short run in recent years, while platinum’s hedging ability is virtually non-existent after the global trade wars. Conversely, the positive influences from gold price on GEPU underline that the gold market plays a prospective role in the situation of economic policies worldwide, which does not exist in the silver market. Besides, the effects of platinum price on GEPU change from positive to negative, suggesting that the underlying cause of its forward-looking effect on GEPU alters from the investment value to the industrial one. In the context of the increasing instability of global economic policies, the above conclusions could offer significant lessons to both investors and governments.