The role of uncertainty dynamics in the interconnectedness between gold and oil markets

Baris Kocaarslan and Alper Gormus

Abstract

This research examines the determinants of dynamic connectedness between gold and oil markets. First, the time-varying parameter–vector autoregression approach is applied to analyze averaged connectedness, networks and dynamic spillovers. In this analysis, we consider gold and oil prices and their corresponding uncertainties (implied volatilities). The analysis identifies gold market uncertainty as the primary risk transmitter, followed by oil market uncertainty, with gold prices as the primary risk receiver. Next, we apply vector autoregression impulse-response analysis to study the drivers of dynamic spillovers between oil and gold markets. The results suggest that total dynamic connectedness responds more strongly and positively to shocks in stock, exchange rate and interest rate market uncertainties than to other risk and uncertainty factors. Further, these responses are more pronounced when examining spillovers across different markets (oil and gold markets) than when analyzing spillovers within the same market. The implications of the analyses offer important insights for policy makers and investors.