Dynamic conditional correlation and volatility distributions in Tokyo, London, and New York gold markets


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This study investigates the volatility and co-movement of gold prices across Tokyo, London, and New York gold markets. Using a dynamic conditional correlation (DCC) model, the authors estimate the cross-correlation and volatility of gold in each pair among three markets over the period from 1993 to 2012. Both the time-varying correlations and realized distributions are explored. After estimating the DCC as well as the corresponding distributions of the DCC among the three markets, the results suggest that: (i) the DCC probability distribution of London and New York shows a higher volatility associated with a higher DCC value; (ii) the DCC probability distribution between London and New York as well as between Tokyo and London both express the similar and overlapping pattern, implying that these markets are almost equal, and neither dominates; and (iii) New York exhibits a spillover effect of Tokyo’s variance, while the latter does not influence New York’s variance. The shapes of the distributions show that the distribution of high DCC is wider than that of low DCC, meaning that risk increases with the dynamic correlation. The implications of these gold DCC probability distributions encourage investors to diversify their global portfolios and manage latent risks in different gold markets effectively. Besides, the volatility-threshold DCC model suggests that the correlations are more sensitive to extreme volatility thresholds in London and New York markets, whereas the correlation is significantly affected by all levels of volatility at 50%, 75%, 90%, and 95% thresholds in Tokyo and London markets. Investors may not be able to diversify portfolio risk by choosing London and New York at the same time once gold becomes volatile as a high correlation is observed in the extreme thresholds.

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    • Figure 1. Distributions of dynamic conditional correlations for the Tokyo, London, and New York gold markets over the sample period
    • Figure 2(a). Distributions of DCC between Tokyo and London gold markets on low and high volatility days
    • Figure 2(b). Distributions of DCC between London and New York gold markets on low and high volatility days
    • Figure 2(c). Distributions of DCC between New York and Tokyo gold markets on low and high volatility days
    • Table 1. Summary statistics of daily gold returns in Tokyo, London, and New York
    • Table 2. The correlation of gold among Tokyo, London, and New York
    • Table 3. DCC conditional correlation estimates: three markets
    • Table 4. Estimation results from DCC-GARCH model
    • Table 5. DCC distributions of gold among Tokyo, London, and New York markets
    • Table 6. Volatility threshold and dynamic conditional correlation