Cointegration with Regime Shift between Gold and Financial Variables

Abstract

This paper investigates the long-run relationship between gold and three main financial variables based on daily data from January 1990 to May 2013. By using the Gregory–Hansen cointegration test, we show that there exists a cointegrating relation with regime shift between gold and the three financial variables, namely the short-term interest rate, value of US dollar, and stock index. Furthermore, taking into account the regime shift, we estimate the cointegrating vector by employing the dynamic ordinary least squares estimation and find that the coefficients of most of the financial variables have grown in terms of absolute value in later years. This finding implies that gold has begun to be regarded as an important financial asset for making effective investments.