Pandemic-Induced Volatility: Spillover Effects Between Oil, Gold, and Currency Markets

Abstract

Using high-frequency data, realized volatility, and the spillover index technique, this study examined the risk asymmetry and relationship between oil, gold, and foreign currency during the COVID-19 pandemic. In the early stages of the pandemic, the overall volatility spillover in the system fell, which may suggest that the pandemic dampens trading activity in the financial markets by constraining people movement. However, the spillover witnessed a temporary dramatic surge owing to fear. (2) The risk relationship between the currency rate and domestic crude oil was robust before the outbreak but much weaker thereafter. These variations in the spread of pandemic risk emerged later, suggesting a certain latency. However, the pandemic had little effect on the asymmetric risk connectedness between oil, gold, and the exchange rate over the sample period, whereas risk transfer due to negative news was the dominant force. However, unlike oil and currency exchange prices, gold was less affected by the negative news. Our findings suggest that improving the structure of foreign exchange reserves and developing Chinese crude oil futures might mitigate volatility-related currency rate spillovers. Increase the proportion of gold in your country's foreign currency reserves as evidence suggests it may operate as a crude oil hedge.