Realized distributions of dynamic conditional correlation and volatility thresholds in the crude oil, gold, and dollar/pound currency markets

Abstract

This chapter proposes a modeling framework for the study of co-movements in price changes among crude oil, gold, and dollar/pound currencies that are conditional on volatility regimes. Methodologically, we extend the dynamic conditional correlation (DCC) multivariate GARCH model to examine the volatility and correlation dynamics depending on the variances of price returns involving a threshold structure. The results indicate that the periods of market turbulence are associated with an increase in co-movements in commodity (gold and oil) prices. By contrast, high market volatility is associated with a decrease in co-movements between gold and the dollar/pound or oil and the dollar/pound. The results imply that gold may act as a safe haven against major currencies when investors face market turmoil. By looking at different subperiods based on the estimated thresholds, we find that the investors‘ behavior changes in different subperiods. Our model presents a useful tool for market participants to engage in better portfolio allocation and risk management.