A Study On The Effectiveness Of Gold Hedging Against Usd Exchange Rate Risk

Ever since the 2008 financial crisis,the Fed conducted 4 rounds of quantitative easing monetary policy(QE)to bolster the United States economy,and in 2014,the Fed began to quit QE gradually.The implementation and quit of QE policy have a profound effect on the asset price,such as US dollar.In particular,during the first three rounds of QE policy,the dollar index tumbled and even reached the lowest point 68.1 for a time.However,after the Federal Reserve implemented QE4 and phased out QE,the dollar index soared dramatically.By the end of November 2015,the dollar index already reached 94.8.Due to the fear of the sharp volatility of the dollar,central banks,financial institutions and enterprises have taken measures to avoid exchange rate risk.Gold has been the first choice as a hedge asset against the US dollar risk for a long time.During QE,gold price has soared from lowest$650.5/ounce in 2007 and reached peak of $1813.5/ounce,with the amplitude 278.8%.In order to study systematically US dollar exchange rate risk characteristics,policy transmission mechanism and the gold hedging effects during US QE policy,this study develops as follows:First,this paper reviews the background of the QE policy,the scheme and hedging effects of gold as a hedge asset.To begin with,this paper systematically reviews the background of QE and the implementation process,which lays a solid foundation for further study.Next,we analyze the schemes to hedge against US dollar risk,including gold hedging and non-gold hedging.In particular,we focus on the mechanism of gold as a hedge asset against US dollar.That is,the hedging relation between gold and dollar is mainly affected by the monetary attribute and hedging properties of gold.Finally,we introduce the measurement methods of hedging effects,including mutual relation,hedge weights and hedge effects measurements.Since the Copula function can accurately measure the dependence structure among variables,the basic theory of Copula function and the commonly used Copula functions are introduced regarding mutual relation measurement.At the same time,based on the mean-variance method,we illustrate the calculation of optimal hedge weights,and review the measurement methods of hedging effects,such as the bilateral risk measurements characterized by ? and the unilateral risk measurements,such as VaR and CVaR.Second,we study the transmission mechanism of QE and analyze the effects of QE on gold and exchange rate in both short term and long term.To start with,this paper first analyzes the mechanism of US QE policy affecting gold and dollar exchange rate based on signal channel,portfolio balance channel and liquidity channel.The impact of the signal channel on gold and the dollar is uncertain,while QE causes the rise of gold price and the decrease of dollar exchange rate on portfolio balance channel and liquidity channel.In the second place,we use event study to study the influences of QE on gold price in the short term.The results show that the implementation and quit of QE have significant effects on short-term gold price.In the long term,the results of rolling regression show that the the relationship between the two variables is time-varying.Finally,we test the effects of QE on US dollar empirically.In the short-term,the event study shows that QE has significant effects on dollar exchange rate.In the long-term,the covariance method shows that the QE significantly affects the exchange rate in related countries,especially the BRICS,of which the exchange rate in China is mostly affected.Third,we study the risk dependency between gold and USD exchange rate during the whole period and different stages of US QE policy.First,during the QE implementation period,empirical hypothesis is proposed by joint distribution function,which could measure average correlation and tail relationship based on Copula model.Based on that,we estimate Copula functions under skewed-t distribution,according to features of data distribution,to measure gold and dollar exchange rate dependence respectively.Results show that the DCC-t-Copula is optimal fitted.This verifies that gold can hedge against exchange rate risk on average and in extreme conditions and the hedging capabilities changes with time.Next,the DCC-t-Copula coefficients between gold and dollar at different stages of QE show that the implementation of QE result in an increase degree of gold and the US dollar exchange rate dependence,that is to say ability of gold hedging against US dollar exchange rate risk was enhanced.Finally,the effectiveness of gold hedging US dollar exchange rate risk during the whole period and different stages of QE is analyzed.In the first place,the optimal asset allocation of gold hedging US dollar exchange rate risk is computed based on minimum risk portfolio theory.Second,we test the effectiveness of gold hedging against US dollar during the whole period and different stages of QE.The results show that during US QE policy implementation period,the portfolio could effectively hedge against US dollar exchange rate bilateral risk and extreme tail risk,using a method,static and dynamic VaR methods.On the other hand,due to the dramatic changes in the international financial markets,the volatility risk of financial time series are different under given conditional information at different stages of QE.Therefore,we establish EGARCH-X-t model to test the effectiveness of gold hedging US dollar exchange rate risk at different QE stages.The results show that the asset allocation scheme can effectively hedge against exchange rate risk.The results reveal that the short-term risk agglomeration effect and long-term dynamic time-varying characteristics of gold price and USD exchange rate based on US QE policy,the hedging relationship under different market conditions and the effectiveness of the optimal asset allocation scheme hedge USD exchange rate risk,that provide theoretical support and empirical basis for the government departments,enterprises and individuals to avoid USD exchange rate risk.