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An Empirical Analysis of the Relationships between Crude Oil, Gold and Stock Markets

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Oil and gold are used as investment assets and so they are closely related to the evolution of stock market indices, given that any influence on decisions about investment portfolios can affect stock market returns. Consequently, it is important for investors to analyze the direction of influence between crude oil, gold and stock markets when designing and implementing their investment strategies. Thus, this paper studies the direction of the causality among the three markets for the US case. In doing so, we apply linear and non-linear Granger causality tests for daily data from the Great Moderation onwards. Evidence is provided as to the importance of considering the possibility of nonlinear relationships between the three markets, a feature which cannot be revealed using conventional linear causality tests which would therefore lead to an information loss about the true link. The results for the full sample indicate that the causality goes in all directions, which implies that changes in the stock market returns may be monitored by observing changes in the returns of the two commodity markets considered (and vice versa). This may help to design substitution investment strategies. The results also indicate that the direction of influence between markets does not exhibit material differences between various subsamples, with the exception of the causality relationship between the two commodity markets. This may in part help explain the contradictory results and mixed conclusions found in previous related literature.

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Energy Specializations: Energy Investment and Finance – Trading Strategies and Financial Instruments; Petroleum – Markets and Prices for Crude Oil and Products; Energy Modeling

JEL Codes: G11: Portfolio Choice; Investment Decisions, G13: Contingent Pricing; Futures Pricing; option pricing, Q41: Energy: Demand and Supply; Prices, Q40: Energy: General

Keywords: Nonlinear Granger-causality test, oil price, gold price, stock markets

DOI: 10.5547/

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Published in Volume 39, Special Issue 1 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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