US Dollar Exchange Rate Elasticity of Gold Returns at Different Federal Fund Rate Zones

IF 2.1 Q2 ECONOMICS Economies Pub Date : 2024-08-28 DOI:10.3390/economies12090229
Michael D. Herley, Lucjan T. Orlowski, Mark A. Ritter
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Abstract

We examine the relationship between gold prices and the U.S. dollar exchange rate, arguing that their interactions are state-dependent and asymmetric under different market conditions. State dependency hinges on different short-term interest rate zones. To prove this point, we determine three distinct levels or zones of the effective federal funds rate using SETAR(2,p) tests. Subsequently, we perform conditional least square estimations of log changes in gold prices as a function of log changes in the nominal broad U.S. dollar exchange rate index for each of the obtained zones. Their relationship is consistently inverse, suggesting that gold and the U.S. dollar are risk-hedging substitutes for normal market periods. This also implies that gold is a safe-haven asset against the U.S. dollar exchange rate risk against a broad range of currencies. The substitution is weaker in the low-interest rate zone, more robust in the intermediate zone, and very pronounced in the high zone. We also perform a Markov switching test on the double-log function of gold prices and the exchange rate. The tests show a pronounced inverse relationship, i.e., substitution between assets, at normal market conditions. The relationship becomes significantly positive during episodes of financial distress, indicating complementarity between gold and U.S. dollar assets.
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不同联邦基金利率区黄金回报的美元汇率弹性
我们研究了黄金价格与美元汇率之间的关系,认为在不同的市场条件下,它们之间的相互作用是国家依赖性和非对称性的。国家依赖性取决于不同的短期利率区。为了证明这一点,我们利用 SETAR(2,p) 检验法确定了有效联邦基金利率的三个不同水平或区间。随后,我们对黄金价格的对数变化与名义广义美元汇率指数对数变化的函数关系进行了条件最小二乘法估计。它们之间的关系始终呈反比,这表明在正常市场时期,黄金和美元是风险对冲的替代品。这也意味着黄金是一种避险资产,可以抵御美元对多种货币的汇率风险。这种替代性在低利率区较弱,在中间利率区较强,而在高利率区则非常明显。我们还对黄金价格和汇率的双对数函数进行了马尔科夫转换检验。检验结果表明,在正常市场条件下,资产之间存在明显的反向关系,即替代关系。在金融困境期间,这种关系明显变为正相关,表明黄金和美元资产之间存在互补性。
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来源期刊
Economies
Economies Economics, Econometrics and Finance-Economics, Econometrics and Finance (miscellaneous)
CiteScore
4.00
自引率
11.50%
发文量
271
审稿时长
11 weeks
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