AN EMPIRICAL INVESTIGATION OF THE CAUSAL RELATIONSHIP BETWEEN GOLD PRICE, EXCHANGE RATE AND CRUDE OIL S.Subhashini* 1, Dr. S.
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1 ISSN: IJMRR/ October 2014/ Volume 4/Issue 10/Article No-3/ S. Subhashini et. al./ International Journal of Management Research & Review AN EMPIRICAL INVESTIGATION OF THE CAUSAL RELATIONSHIP BETWEEN GOLD PRICE, EXCHANGE RATE AND CRUDE OIL S.Subhashini* 1, Dr. S. Poornima 2 1 Asst. Prof, Sasi Creative School of Business, Coimbatore, TamilNadu, India. 2 Assoc Prof, PSGR Krishnammal College for Women, Coimbatore, TamilNadu, India. ABSTRACT This study aims to determine the co integration relationship and causality relationship between Gold price, Exchange rate and Crude Oil for the period of 1 st January 2009 to 31 st December It focuses on the portfolio diversification in different investment areas. Based on the previous research and the Indian sentiment towards investment in gold as the good investment. The gold investment is looked as a safe investment those who hold ideal money and for speculative purpose. The prices of gold are affected by various factors like Exchange rate, Crude oil etc., The research methodology consists in cointergration and causality tests performed on daily data. INTRODUCTION In India, Gold has the immense value from the perspectives of religion, economic reserve, wealth creation and financial assets. In India, the demand for the gold is highest as compared to other developed and developing countries. According to IMF, Indian consumer demand for gold is 37.6 percent more than that of China and it accounts for nearly one-third of the total world demand for gold. The gold is the best commodity used for hedging against inflation. Table 1: Consumer s Gold Demand vis-a vis GDP Consumer demand in selected countries 12 month ended GDP Q3'11* ( Tonnes) (US $ Trillion) Jewellery Total bar and coin invest Total India China Russia USA UK World Total Source: Consumer Demand Figures taken from Gold Demand Trends Third Quarter 2011, World Gold Council, figures are provisional GDP figures taken from UNCTAD, GDP figures for are provisional. The first connection between gold and crude oil has begun in history, when producers of the Middle East required gold in exchange for crude oil. The historical events show the *Corresponding Author 981
2 relationship between gold and oil markets were strong and went through huge development and determined the level of payment. Today, gold and oil, other commodities are predominantly quoted in the US dollars. In relation to oil, major players are OPEC (The Organization of the Petroleum Exploring Countries) which formally agreed to sale its oil production exclusively in U.S. Dollars. The Dollar is widely accepted as the means of both international and domestic payments. Gold and currency market are concerned by the investors, because they have a relatively perfect, fair and more investment opportunities. The importance of the households saving portion has made the public much more aware on the exchange rates of currencies. In this paper, the researchers tried to find out If there is any relationship between Exchange rate of Rupee vs. Dollars volatility and the relationship between them on the price of crude oil. REVIEW OF LITERATURE (Cashin, 1999) analysed on the seven commodities in the time period from 1960 to 1985 with the correlation test, results demonstrated about a significant relationship between the oil and oil. The price co-movement in oil and gold prices were also confirmed from the study of (Pindick & Rotemberg, 1990). (Adibe & Fei, 2010) in their research work revealed about the significant relationship between the price of gold and the value of US dollar. Karunagaran (2011) in his article has mentioned about some factors affecting prices of gold. (Simakova, 2011) has made a study to examine on the co-movement relationship between the gold and oil prices level in the period 1970 to 2010 using the co-integration test and granger causality test. The results confirm that there is a long-term relationship between the oil price levels and gold price in reality. (Samanta & Zadeh, 2012) analyzed the co-movements of selected macro- economic variables (gold, stock, currency and crude oil prices) for 21 years for the period 1989 to Using econometric models, the study exposed that exists a co-integration relationship between the gold price, stock, exchange rate and crude oil prices. (Wang, Wang, & Huang, 2010) examined daily data and time series method was employed in the study to investigate on the impacts of fluctuations of the crude oil, gold and exchange rate on the US dollar over short-term and long- term. RESEARCH METHODOLOGY Objectives 1. To know the effects of Rupee vs. Exchange rate volatility on the price of gold. 2. To know the effects of Rupee vs. Exchange rate volatility on the price of crude oil. 3. Is the strengthing of Rupee reducing the price of Gold and Crude Oil? RESEARCH METHOD This study examines the relationship between the two different variables, the rupee/ exchange rate and the movement of international commodities, Gold and Crude Oil. Before, find out Copyright 2012 Published by IJMRR. All rights reserved 982
3 the relationship between variables. Dickey Muller root test was used to prove to check on the data is stationery. To examine the relationship between the variables correlation and regression analysis are employed. HYPOTHESES Null Hypothesis: There is a present of unit root (a=1(non-stationary)) 1. Null Hypothesis: The crude oil prices do not increase with increase in currency. 2. Null Hypothesis: The Gold prices do not increase with increase in currency. SAMPLE AND DATA The sample data consists of 4 years weekly (5 th April 2009 to December 31 st 2013) close of gold, crude oil and currency (exchange rate of rupee/ us dollar). The secondary data are collected from the websites of MCX, NSEindia.com etc., to test the empirical relationship between the crude oil, gold and currency respectively. To find out on the stationary of the data ADF was used and the relationship between the variables is identified by using the correlation and regression model. Augumented Dickey Fuller (ADF) Test: The testing procedure for the ADF test is the same as for the Dickey Fuller test but it is applied to the model where is a constant, the coefficient on a time trend and the lag order of the autoregressive process. Imposing the constraints and corresponds to modelling a random walk and using the constraint corresponds to modelling a random walk with a drift. Consequently, there are three main versions of the test, analogous to the ones discussed on Dickey Fuller test (see that page for a discussion on dealing with uncertainty about including the intercept and deterministic time trend terms in the test equation.) By including lags of the order p the ADF formulation allows for higher-order autoregressive processes. This means that the lag length p has to be determined when applying the test. One possible approach is to test down from high orders and examine the t-values on coefficients. An alternative approach is to examine information criteria such as the Akaike information criterion, Bayesian information criterion or the Hannan Quinn information criterion. The unit root test is then carried out under the null hypothesis hypothesis of Once a value for the test statistic against the alternative is computed it can be compared to the relevant critical value for the Dickey Fuller Test. If the test statistic is less (this test is non symmetrical so we do not consider an absolute value) than the (larger negative) critical value, then the null hypothesis of unit root is present. is rejected and no Copyright 2012 Published by IJMRR. All rights reserved 983
4 EMPIRICAL RESULTS Results for the Dickey Fuller unit root test for the exchange rate and macro economic variables in log difference. Hypothesis Ho: There is a presence of unit root (a=1 non-stationary) Table 2: Dickey Fuller Unit Root Test for the Exchange rate of Gold and Crude Oil in Log Difference-1 st difference Variables With Constant With Constant & Trend t-statistic p-value t-statistic p-value Crude oil Gold Currency Interpretation: For all the variables the crude oil, gold and currency, the t- statistics and probability (p-value) suggest that the null hypothesis that there is a presence of non-stationary in data and t-statistic indicate that the series are stationary. Table 3: Correlation of Crude Oil, Gold and Currency LCRUDE LEXCHANGE LGOLD LCRUDE LEXCHANGE LGOLD Interpretation: The above table indicates that the correlation co-efficient between the crude oil and currency is 0.39 and this is a positive correlation, and the relationship between the crude oil and gold has a positive correlation of This movement indicates that an increase in the crude oil prices has a positive movement in gold price. Similarly, the currency rate and gold prices has a low positive correlation of 0.22 and the association between the gold and currency has a low positive correlation of The results from the correlation analysis indicate that crude oil and gold moves in a positive direction and other variables has a very low positive correlation. REGRESSION ANALYSIS Table 4: Regression Analysis: Crude Oil and Currency Variable Coefficient Std. Error t-statistic Prob. Constant LEXCHANGE R-squared Mean dependent var Adjusted R-squared S.D. dependent var S.E. of regression Akaike info criterion Sum squared resid Schwarz criterion Log likelihood Hannan-Quinn criter F-statistic Durbin-Watson stat Prob (F-statistic) Copyright 2012 Published by IJMRR. All rights reserved 984
5 Interpretation: Positive Correlation is found between the currency and crude oil over four years. By observing the above table-4 we conclude that an 1% increase in the currency would lead to increase in the crude oil by about 0.567%. The standard error is about 0.085, which is at very low level, it refers to error in regression is very low. The R-square value is 15.2%, so the variation in the model due to exchange rate is explained by 15.2% and the rest of the variation is explained by other factors. The exchange rate influence the crude oil of about 15.2% and proved statistical significance by the t-statistic of with p-value of 0.00 less than Hence, the null hypothesis. The crude oil prices do not influence with an increase in the exchange rate is rejected and alternate hypothesis is that crude oil influence exchange rate is accepted. Table 5: Regression Analysis: Gold and Currency Variable Coefficient Std. Error t-statistic Prob. C LEXCHANGE R-squared Mean dependent var Adjusted R-squared S.D. dependent var S.E. of regression Akaike info criterion Sum squared resid Schwarz criterion Log likelihood Hannan-Quinn criter F-statistic Durbin-Watson stat Prob(F-statistic) Positive correlation is found between the currency and gold prices over four years. By observing the table-4, that 1% increase in the currency leads to the 0.414% increase in gold price. The standard error is this is at low level; it means that error in linear relation is not so high. It supports in predicting the gold price with the increase in the currency. So, the null hypothesis, The gold prices do not increase in the currency is rejected and alternate hypothesis is accepted. CONCLUSION In this study, weekly data of crude oil, gold and currency for last four year (2009 to 2013) were taken and the studied the relationship between the currency and crude oil and the prices of gold and currency. In India, gold is found is one of the traditional investments and it is viewed as secured and liquid investment. The results provide that the currency had a positive relationship between the crude oil and gold prices, an increase in the currency would lead to increase in the crude oil and gold prices and they tend to move in a positive direction. The currency would tend to strengthen the increase in gold price and in turn it reflects in the crude oil. With the residuals test provide that the regression model is fitted and the Jaquera-Bera test confirms that the residuals in the samples are normally distributed. So, there is an impact due to currency on the crude oil and gold prices. It is inferred that an increase in currency would tend to increase the crude oil prices and gold prices. Copyright 2012 Published by IJMRR. All rights reserved 985
6 REFERENCES [1] Adibe K, Fei F. Theories of Gold price movements: common wisdom or myths? undergraduate economic review 2010; 6: 1. [2] Cashin EA. Booms and Slumps in world commodity prices. Newzealand: Reserve bank of Newzealand, [3] Pindick R, Rotemberg J. The excess co-movement of commodity prices. Economic journal 1990; 100: [4] Samanta SK, Zadeh AH. Co-movements of oil, gold and the US dollar and Stocks. Modern Economy 2012; 3: [5] Simakova J. Analysis of the relationship between oil and gold prices. Journal of Finance 2011; 51(1): [6] Wang M, Wang C, Huang T. Relationships among oil price, gold price, exchange rate and international stock markets. International research jounral of finance and economics 2010; 47: [7] [8] [9] [10] [11] [12] APPENDICES The Weekly movement of Crudeoil, Exchange Rate and Gold CRUDEOIL exchange rate GOLD 40 2,000 1,800 1,600 1,400 1,200 1, Graph 1: Weekly movement of Crude oil, Gold and Exchange rate Copyright 2012 Published by IJMRR. All rights reserved 986
7 Residual Actual Fitted Graph 2: Residuals of Crude oil and Exchange rate Residual Actual Fitted Graph 3: Residuals of Gold price and Exchange rate Copyright 2012 Published by IJMRR. All rights reserved 987
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