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On the relationship between the prices of oil and the precious metals: Revisiting with a multivariate regime-switching decision tree

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  • Charlot, Philippe
  • Marimoutou, Vêlayoudom
Abstract
This study examines the volatility and correlation and their relationships among the euro/US dollar exchange rates, the S&P500 equity indices, and the prices of WTI crude oil and the precious metals (gold, silver, and platinum) over the period 2005 to 2012. Our model links the univariate volatilities with the correlations via a hidden stochastic decision tree. The ensuing Hidden Markov Decision Tree (HMDT) model is in fact an extension of the Hidden Markov Model (HMM) introduced by Jordan et al. (1997). The architecture of this model is the opposite that of the classical deterministic approach based on a binary decision tree and, it allows a probabilistic vision of the relationship between univariate volatility and correlation. Our results are categorized into three groups, namely (1) exchange rates and oil, (2) S&P500 indices, and (3) precious metals. A switching dynamics is seen to characterize the volatilities, while, in the case of the correlations, the series switch from one regime to another, this movement touching a peak during the period of the Subprime crisis in the US, and again during the days following the Tohoku earthquake in Japan. Our findings show that the relationships between volatility and correlation are dependent upon the nature of the series considered, sometimes corresponding to those found in econometric studies, according to which correlation increases in bear markets, at other times differing from them.

Suggested Citation

  • Charlot, Philippe & Marimoutou, Vêlayoudom, 2014. "On the relationship between the prices of oil and the precious metals: Revisiting with a multivariate regime-switching decision tree," Energy Economics, Elsevier, vol. 44(C), pages 456-467.
    • Handle: RePEc:eee:eneeco:v:44:y:2014:i:c:p:456-467
    DOI: 10.1016/j.eneco.2014.04.021
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    More about this item

    Keywords

    Multivariate GARCH; Dynamic correlations; Regime switching; Hidden Markov Decision Tree;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G1 - Financial Economics - - General Financial Markets
    • G0 - Financial Economics - - General

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