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Do gold and the US dollar diversify global sectoral risk? Evidence from connectedness and dynamic conditional correlation measures

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  • shah, Adil Ahmad
  • Bhanja, Niyati
  • Dar, Arif Billah

Abstract

The use of Information and Communication Technology (ICT) in fund management coupled with financial liberalization prompts us to explore the global sectoral connectedness and risk management potential of gold and the US dollar. The asymmetric interdependence (and behaviour) of financial markets (and their participants) further motivates us to understand the upside and downside market connections along with their mean-based connections. Variance decomposition-based spillover measures in vector auto-regressive space are used for that purpose. The mean-based total and directional spillover measures show that the global stock markets are highly connected at the sectoral level, reflecting higher odds of global sectoral shock transmission. The directional spillover measures further reveal that the industrial and financial sectors are systematically important sectors for transmitting global sectoral shocks. Their asymmetric and time-varying counterparts suggest that global sectoral connectedness dominates in downside markets and during crisis events. Specifically, the late European Debt Crisis, the Brexit referendum, the US-China trade war, and the COVID-19 pandemic are characterized by asymmetric and higher global sectoral shock transmission. We also show that the inclusion of gold and the US dollar with global sectoral stocks has the potential to diversify the global sectoral risk.

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  • shah, Adil Ahmad & Bhanja, Niyati & Dar, Arif Billah, 2023. "Do gold and the US dollar diversify global sectoral risk? Evidence from connectedness and dynamic conditional correlation measures," The Journal of Economic Asymmetries, Elsevier, vol. 28(C).
    • Handle: RePEc:eee:joecas:v:28:y:2023:i:c:s1703494923000166
    DOI: 10.1016/j.jeca.2023.e00304
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    Cited by:

    1. Herley, Michael D. & Orlowski, Lucjan T. & Ritter, Mark A., 2023. "Asymmetric responses of equity returns to changes in exchange rates at different market volatility levels," The Journal of Economic Asymmetries, Elsevier, vol. 28(C).
    2. Wang, Mei-Chih & Chang, Tsangyao & Mikhaylov, Alexey & Linyu, Jia, 2024. "A measure of quantile-on-quantile connectedness for the US treasury yield curve spread, the US Dollar, and gold price," The North American Journal of Economics and Finance, Elsevier, vol. 74(C).

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    More about this item

    Keywords

    Asymmetric sectoral connectedness; COVID-19; Global sectoral risk management;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General

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