Dynamics of connectedness across crude oil, precious metals and exchange rate: Evidence from time and frequency domains

Abstract

The study explores connectedness across crude oil, precious metals (gold, silver, platinum and palladium) and foreign exchange on both time and frequency domains. The time-domain Diebold and Yilmaz (2012) and the frequency-domain Baruník and Křehlík (2018) measures of connectedness use daily data ranging from 28th April 2006 to 31st December 2019 for that purpose. The overall spillover measure indicates that on average and across entire sample, approximately 41% of the return spillovers in all the markets considered is due to interconnectedness. However, the directional spillovers show weak integration of crude oil and foreign exchange with precious metals, suggesting diversification opportunities. We further decompose overall spillovers into various frequencies and find that most of the interconnectedness are driven by very short-time horizons followed by short, very medium, medium and longer-time horizons. Furthermore, the rolling window estimates of connectedness indicate that spillovers are relatively higher during the periods of market uncertainty, such as Global Financial Crisis and European Debt Crisis. These findings are helpful for asset allocation and portfolio management to policymakers and market participants with heterogeneous investment horizons.