On the conditional dependence structure between oil, gold and USD exchange rates: Nested copula based GJR-GARCH model

Energy commodities and precious metals differ from other trading products. Both oil and gold prices are leading economic variables, and drive the evolution of the world economy. Since the US dollar is used as the primary currency of international crude oil and gold trading, the relationship between commodities, metals and exchange rates has become a major research agenda recently. Therefore, this study proposes a Nested copula-based GJR-GARCH model to explore the dependence structure between oil, gold, and the USD exchange rate. More importantly, a comparative framework based on two sub-periods is implemented to capture the co-movement during normal and crisis periods. Empirical results suggest that for both crisis periods the dependence between oil, gold and the USD exchange rate is stronger compared with the dependence during the untroubled period. Moreover, the co-movement is accelerated which is explained by the unusual movement of the USD during the global financial crisis of 2007–2009.