Precious metal returns and oil shocks: A time varying connectedness approach

This paper examines the impact of oil shocks on precious metal returns using structural vector autoregression (SVAR) model proposed by Kilian and Park (2009). We capture variability in the effects through rolling window impulse response functions and by extending the dynamic connectedness approach of Diebold and Yilmaz (2014) using structural forecast error variance decomposition. We report time varying effect of disintegrated structural oil shocks on precious metal returns with a significant increase during the global financial crisis period of 2008-09. Our results also indicate that the aggregate demand shocks have most significant spillover effect on the precious metals except gold. We also report that oil specific demand shocks have highest impact on gold during the financial crisis and palladium having possible hedging opportunities against oil price movement. These findings have important investment implications for individual and institutional investors.