Technology shocks - Gold market connection: Is the effect episodic to business cycle behaviour?

Abstract

We explore the connection between technology shocks (TS) and gold return volatility using the various variants of the newly developed TS data and covering several decades from 1950. The consideration for a long range of data affords us to test whether or not the nexus is sensitive to business cycle dynamics. We employ the GARCH-MIDAS framework to establish the connection owing to the mixed data frequencies of the variables of interest. Overall, we find that technological innovations drive higher volatilities in the gold market from a long term perspective. Examining the role of business cycles in the nexus, we partition the analyses into expansion and recession periods. Consequently, we show that the role of business cycles is indeed crucial as the TS increase the level of gold volatility during the period of expansion relative to the period of recession. This justifies that improvements in the economy may further stimulate technological innovations, and by extension, enhance the trading activity in the gold market. Finally, we also demonstrate the forecast gains of including the TS in the predictive model of gold volatility rather than subsuming it in the (aggregate) market risk. Our results are robust to multiple out-of-sample forecast horizons and alternative measures of gold returns, and technology shocks.