Assessing risk contagion among the Brent crude oil market, London gold market and stock markets: Evidence based on a new wavelet decomposition approach

In this paper, we investigate the risk contagion among the Brent crude oil market, London gold market and stock markets (Chinese and European). In the paper, we employ the CEEMDAN method and fine to coarse algorithms to decompose these market returns into different components. Then, we use the Granger causality test to assess the risk contagion between these markets under different time and frequency components. The results show that single direction risk contagion running from the Brent crude oil market and the London gold market to the stock markets (Chinese and European) is found in irregular events. Similarly, irregular events can also cause the single direction risk contagion to run from European stock markets to the Brent crude oil market. However, bidirectional risk contagion among the Brent crude oil market, London gold market and stock markets (Chinese and European) are found in extreme events. Second, bidirectional risk contagion among the Brent crude oil market, London gold market and European stock markets is demonstrated in irregular events. In addition, there exists only unidirectional risk contagion running from stock markets (Chinese and European) to the Brent crude oil market under extreme events. Third, long memory and asymmetry GARCH effects with fat tail distributions are significant in assessing risk contagion between the London gold market and European stock markets under extreme events. Finally, nonlinear Granger causality running from crude oil markets to the stock markets (Chinese and European) is found in bull and bearish markets. In addition, nonlinear Granger causality running from Chinese stock markets to the gold market and from the gold market to the European stock markets is found in extreme bearish markets.