Analysis of the Relationship Between the Crude Oil and Gold Markets

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Boğaziçi University

Financial Engineering Department

Analysis of the Relationship Between

Oil, Gold, USD Index, BIST100 returns and VIX (CBOE Volatility Index)

May 2016

Team Members:

Okan Ertürk

Orhun Dinçer

Academic Advisor:

Prof. Nesrin Okay

Table of Contents

1.        Introduction        

2.        Objectives of the Study        

3.        Methodology and Data        

4.        Review of Literature        

5.        Conclusion        

6.        References        

1. Introduction

The crude oil and gold markets is the main representative of the large commodity markets and seem to drive the price of other commodities. On the one hand, gold is the leader in the precious metal markets and is considered as an investment asset. Gold is a safe harbor to avoid an increase in financial risk and a hedge against inflation; consequently it is used as a fundamental investment asset. On the other hand, crude oil is the main source of energy and is also used as an investment asset. Therefore, investors often include one of the two commodities –gold and crude oil– or both in their investment portfolios as a diversification strategy (Sari et al., 2010).

Since, the U.S. is the base for financial markets and the currency U.S. dollar used heavily on global trade, its value can affect or can be affected by the movement in the commodity markets. Like Abbott et al. (2008) and other studies (Harri et al., 2009; Ferraro et al., 2012) all highlight the effects of changing crude oil prices on exchange rates. Nevertheless, a comprehensive evaluation of the relationship between the U.S. Dollar exchange rate, oil, and gold prices has not been conducted.

In order to create a global perspective and explain the rate of the effect of global volatility on the studied elements, adding VIX (CBOE Volatility Index) to the comparison will be beneficial.