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Is gold a safe haven for the dynamic risk of foreign exchange?

Author

Listed:
  • Kuan-Min Wang

    (Overseas Chinese University)

  • Thanh-Binh Nguyen Thi

    (Chaoyang University of Technology)

  • Yuan-Ming Lee

    (Southern Taiwan University of Science and Technology)

Abstract

This paper uses the panel data of 15 countries from 2009 to 2020 to construct the time-varying parameter panel vector error correction model for testing the hypothesis of dynamic hedging characteristics of gold on exchange rate. As the existing literature has never considered that the foreign exchange risk hedged by gold is dynamic, this study can fill the research gap in this area. The empirical results show that: First, gold can partly hedge against the depreciation of the currency in the long run; second, gold is unable to hedge against the risk of the exchange rate when considering dynamic hedging effects in the short run; third, when facing unexpected shocks, the impulse response shows that the gold returns have reversible reactions compared to exchange rate fluctuations; therefore, gold can regard as a safe haven for foreign exchange markets; Finally, the government, as well as investors should always be concerned about these dynamic risks and formulate effective hedging strategies to control the currency uncertainty.

Suggested Citation

  • Kuan-Min Wang & Thanh-Binh Nguyen Thi & Yuan-Ming Lee, 2021. "Is gold a safe haven for the dynamic risk of foreign exchange?," Future Business Journal, Springer, vol. 7(1), pages 1-17, December.
    • Handle: RePEc:spr:futbus:v:7:y:2021:i:1:d:10.1186_s43093-021-00101-9
    DOI: 10.1186/s43093-021-00101-9
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    More about this item

    Keywords

    Gold price; Foreign exchange risk hedge; Time-varying parameter; Panel VECM model; Impulse response;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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