Gold-oil dynamic relationship and the asymmetric role of geopolitical risks: Evidence from Bayesian pdBEKK-GARCH with regime switching

Abstract

The crude oil and gold markets have affected economies in various aspects and are highly sensitive to geopolitical risks. However, the literature remains understudied with studies on the relationship between the link of gold-oil and geopolitical risks. To examine nonlinear and asymmetric effects of geopolitical risks on the relationship of gold-oil, this paper first employs the Bayesian positive diagonal BEKK-GARCH model to capture the time-varying correlation between gold market and oil market. Secondly, the threshold vector error correction model (TVECM) results reveal a transmission running from geopolitical risks to the relation of gold-oil in the long run. Thirdly, our study further shows diversity in different time scales using the maximum overlap discrete wavelet transformation (MODWT) method. Specifically, the geopolitical risks volatility is affected by the gold-oil in the short term and gradually becomes independent in the medium-long term. Finally, we find that geopolitical risks play a dominant role in the extreme regime. These findings are of great significance for investors with different horizons to understand the relation of gold-oil markets under the impact of the geopolitical risks and to make suitable diversification of portfolios.