Threshold effects in the relationships between USD and gold futures by panel smooth transition approach

Abstract

Using a Panel Smooth Transition Regression (PSTR) model, this study sets crude oil as threshold variable, and Volatility Index (VIX) and Morgan Stanley Capital International (MSCI) for Emerging Market Index (MSCI-E) as control variables to investigate the nonlinear dynamic relationship between USD/yen and gold futures in the Commodity Exchange, Inc. (COMEX). Empirical results show that the transition function is a logistic type. In region 1, the price of crude oil is low. The sign of VIX is positive. USD/yen exerts negative impact on gold market due to the way that gold market functions as a factor of hedge against portfolio and geopolitical risk. In region 2, the price of crude oil is higher (the demand for crude oil may be stronger). The economy is prosperous; VIX turns low; USD/yen increases. Investors have more money from other financial markets to buy gold, thus, causing gold futures price to rise. Besides, gold is both a hedge and a safe haven for developing countries but not for emerging countries; therefore, the relationships between gold and MSCI-E are positive in both regions.

Keywords:

• Panel Smooth Transition Regression model
• VIX
• transition function
• threshold effects

JEL Classification:

• G10
• F31
• G13
• G15

Notes

¹ A grouping acronym that refers to the countries of Brazil, Russia, India and China, which are all deemed to be at a similar stage of newly advanced economic development.

² COMEX is also a division of the New York Mercantile Exchange (NYMEX).

³ VIX is the ticker symbol for the Chicago Board Options Exchange VIX, a popular measure of the implied volatility of Standard & Poor (S&P) 500 index options.

⁴ For more details, see Gonzàlez et al. (2005) and Colletaz and Hurlin (2006).

⁵ The VIX is known as the fear index.