The Causal Relationship Between Fear Sentiments And Gold Prices

Gold has the dual attributes of commodity and currency,and it is an important means for investors to maintain and increase asset value.When there are uncertain changes in economic policy,irrational emotions can easily spread in the market.Especially during the financial crisis or the economic downturn brought about by the COVID-19 pandemic that we are experiencing,fear sentiments can greatly affect the investment behavior of investors.As a safe-haven asset,gold can be used as a hedge asset for fear sentiments and alleviate asset losses caused by excessive panic.Therefore,it has certain practical significance to study whether fear sentiment affects the price of gold and the time-varying causal relationship between the two variables.This will provide a new way of thinking for the government to stabilize financial markets.This paper aims to study the bidirectional causal relationship between fear sentiments and gold prices.Firstly,we organize and read literatures related to fear sentiments and gold prices,and build the study framework for this paper.Secondly,this paper takes the current gold prices in New York,London and Shanghai gold markets as examples to further describe the time-varying characteristic relationship between fear sentiments and gold prices in different markets,then further supplement and improve the study on this topic.Moreover,this paper analyzes and illustrates the impact mechanism and related theoretical models of gold price and panic,expounds the relevant empirical analysis methods,and clarifies the steps of the testing sequence.Through the parameter stability test and DCC-GARCH model test,it is proved that the traditional Granger causality test analysis results are not accurate enough,and there is a time-varying relationship between variables.Therefore,we use the sub-sample rolling-window causality test is used to explore the relationship between fear sentiments and the gold market in different countries,analyze and discuss the results,and finally put forward relevant policy recommendations.The paper draws the following conclusions: 1.From the perspective of DCC-GARCH model testing,there is a strong,dynamic and time-varying linkage between the gold market of China,the United States and the United Kingdom and fear sentiments.2.From the perspective of time-varying relationship,there is a bidirectional causal relationship between fear sentiments and the current prices of gold in certain periods.But these links between panic and gold in different markets are not stable and only exist in the short term.In other periods,there was no significant causal relationship.In different periods,we can further explain and prove the correlation between variables through economic laws and corresponding policy events.Finally,according to the empirical results,investors can consider using gold as a hedging asset to optimize their investment portfolios to avoid the risks brought by fear sentiments,and policymakers can reduce market fear sentiments by formulating and improving relevant policies.In addition,China’s gold market also needs to be further developed and improved to enhance its international influence.