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Precious Metals-Exchange Rate Volatility Transmissions and Hedging Strategies

Shawkat M. Hammoudeh 

Drexel University - Lebow College of Business

Yuan Yuan 

affiliation not provided to SSRN

Mark A. Thompson 

Texas Tech University - Rawls College of Business

Michael McAleer 

Erasmus University Rotterdam - Erasmus School of Economics, Econometric Institute; Tinbergen Institute; University of Tokyo - Centre for International Research on the Japanese Economy (CIRJE), Faculty of Economics
October 28, 2009

Abstract:      
This study examines the conditional volatility and correlation dependency and interdependency for the four major precious metals (that is, gold, silver, platinum and palladium), while accounting for geopolitics within a multivariate system. The implications of the estimated results for portfolio designs and hedging strategies are also analyzed. The results for the four metals system show significant short-run and long-run dependencies and interdependencies to news and past volatility. These results have become more pervasive when the exchange rate and FFR are included. Monetary policy also has a differential impact on the precious metals and the exchange rate volatilities. Finally, the applications of the results show the optimal weights in a two-asset portfolio and the hedging ratios for long positions.