Multi-scale dependence structure and risk contagion between oil, gold, and US exchange rate: A wavelet-based vine-copula approach

Abstract

Abstract This study makes a systemic analysis of dependence and risk contagion among oil, gold, and the US dollar foreign exchange (US FX) markets, employing the wavelet method and a time-varying tri-variate vine-copula model. Compared to previous research, our empirical findings not only reveal the impact of co-variate instead of pairwise analysis, but also reveal the patterns of heterogeneity influence in different time horizons. Both dynamic average dependence and tail dependence show that the three assets are better integrated in the medium-run time scales than the short-run time scales, whereby US FX connects the three assets in the short-term, while gold does so in the medium-term. All three multi-variate scenarios show that risk contagion is temporal at different time scales. The oil market was found to be more sensitive to the upside and downside risk contagion of the gold market in the short-run time scales, and vice versa. Asymmetry also shows that both the US FX and gold market are more sensitive to upside and downside risk contagion in the medium-run time scales.