Investigating the dynamic contagion effect of the turbulence cycle between the gold futures market and the exchange rate using GARCH-BEKK, markov switching, and structural VAR models

With the expansion of globalization, financial markets in both developed and developing countries have become interconnected. In financial discourse, the interconnection between financial markets is referred to as financial contagion. Financial contagion can transmit the volatility of one market to another, potentially leading to economic booms, recessions, or varying levels of risk and return. Consequently, given the significance of volatility contagion in markets for investors and decision-makers, the purpose of this study is to examine the effect of dynamic contagion in the volatility cycle between the futures market of gold and the foreign exchange rate in financial markets and the Tehran Stock Exchange.

The data were collected daily over the period from 2009 to 2018. To test the research hypotheses, GARCH-BEKK models, Markov Switching, and Vector Autoregression were employed.

The results of the study indicate that the contagion effect of volatility is from the foreign exchange market to the gold futures market. Moreover, the contagion effect of volatility from the foreign exchange market to the gold futures market varies across different regimes.

Originality / Value: 

The findings of this research could provide new insights that may guide policymaking and decision-making in the financial industry.