Resources Policy 46 (2015) 202–211

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Resources Policy
journal homepage: www.elsevier.com/locate/resourpol

Nonlinear causality between oil and precious metals

Melike E. Bildirici a,n, Ceren Turkmen b
a
Yıldız Technical University, Department of Economics, Barbaros Bulvarı, 34349 Beşiktaş, Istanbul, Turkey
b
Sakarya University, Geyve Vocational School, Banking and Insurance Department, 54700, Geyve, Sakarya, Turkey

art ic l e i nf o a b s t r a c t

Article history: This work aims to analyze the cointegration and causality relationship among oil and precious metals of
Received 31 October 2014 gold, silver and copper by using nonlinear ARDL and two popular nonlinear causality tests; Hiemstra and
Received in revised form Jones (1994), and Kyrtsou and Labys (2006) test for the period from 1973:1 through 2012:11 monthly.
25 March 2015
According to the asymmetric Kyrtsou and Labys test (2006) results, an interesting finding emerges;
Accepted 1 September 2015
precious metal prices returns respond nonlinearly to shocks to changes in crude oil prices only at earlier
Available online 20 October 2015
lags. Symmetric case results imply that there is evidence for bidirectional causality between pairs of oil
Keywords: and gold price and oil and silver price. Moreover a unidirectional relationship emerge for oil and copper
Oil and gold price volatility prices for the asymmetric positive case and no causality for other cases. According to Hiemstra and Jones
Non-linear ARDL
causality test, bi-directional causality between gold and oil and copper and oil and a unidirectional
Non-linear Granger causality
Granger causality running from oil price to silver price have emerged. In this way, asymmetric Kyrtsou
Mackey Glass Model
and Labys (2006) results and Hiemstra and Jones (1994) results are different. Although the tests do not
provide consistent results for the considered commodities, it can be concluded that, our models grasped
the nonlinear nature in the price discovery process, hence partially captured the nonlinearity between oil
and gold markets and their important role in macroeconomy.
& 2015 Elsevier Ltd. All rights reserved.

1. Introduction especially in periods of political and economic instability. There is

Oil and precious metals like gold, silver and copper are strategic
commodities which volatility of their price has received much
attention. Crude oil is maybe the most strategic commodity,
probably is an indicator for all price trends and vital for production
processes. On the other hand, the price movements in gold and
crude oil have an impact on changing the price trends of the whole
commodity markets. In this way, investigating their relationship
over price discovery helps to provide some information for both
forecasting the crude oil price, the gold price and the potential
effects on commodity markets.
The volatility and influence of oil and gold price has become
increasingly crucial for world economic development. The volati-
lity of the precious metal prices depends on the rise-and-fall of the
oil and gold price and sudden increase of oil price causes economic
slowdown and increases of other commodity prices. Moreover,
increase of oil price can be thought as a tax levied from oil ex-
porting countries to oil consumers.
Additionally, gold has been an important precious metal for
many centuries, and it plays a role as a means of store of value
n
Corresponding author. Fax: þ90 2122366423.
E-mail addresses: melikebildirici@gmail.com (M.E. Bildirici),
cerozer@yahoo.com.tr (C. Turkmen).
an evident advantage and outstanding position of gold. The role of
the gold market in the large commodity market has received in-
creasing attention by both academic world and real sector. As it
will be mentioned in detail at subsequent sections, gold remains as
a safe haven especially considering the remarkable fluctuations in
oil price, such as first and second oil price crisis and 2006 oil price
shock. During I. and II. oil crisis, gold prices have increased sig-
nificantly, followed a relatively flat pattern till 2005 and began to
rise afterwards1. It should be noted that, oil prices has also faced
with price increases at that period.
This work aims to analyze the cointegration and causality re-
lationship between oil and precious metals by using nonlinear
ARDL (NARDL) and two causality tests, namely; Hiemstra and
Jones test (1994), and Kyrtsou and Labys (2006) test by Mackey
Glass model. The main reason beneath using two different
1
The main difference between 2006–2007 oil price shock and earlier oil price
shocks lies in the cause of the shocks. While the previous shocks are caused by
physical supply limitation, the 2006–2007 crisis was caused by strong demand due
to “Global Modernation Era”. In 1970s energy crisis, the major industrialized
countries faced with oil shortages caused by interruptions in oil exports from
Middle East due to political reasons such as the oil embargo against Israeli military
or the Iranian revolution. Although the causes were different, the economic results
were similar, such as decreases in consumption spending and demand in auto-
mobile and related industries.

http://dx.doi.org/10.1016/j.resourpol.2015.09.002
0301-4207/& 2015 Elsevier Ltd. All rights reserved.
 M.E. Bildirici, C. Turkmen / Resources Policy 46 (2015) 202–211
nonlinear causality tests, as it will be brought up in subsequent
sections, is for a cross check for the results.
This study primarily focuses on the use of nonlinear models;
the main reasons for this can be stated as follows. Due to the ef-
fects of economic circumstances, energy commodities and most of
precious metals exhibit a nonlinear behavior over time, like an
economic or financial variable. Hence, their interaction among
them is also nonlinear. The theoretical and empirical roots of this
nonlinear behavior may rely upon the fragibility of macro-
economic variables may possibly be caused by economic crises
(e.g., 1970s crisis, OPEC decisions, ERM Crisis, 1994 Russian Crisis
the 1997–1998 Asian Crisis, the 2008–2010 global financial crisis),
wars and other geopolitical extreme events effective in supplier or
demander nations (e.g. first and second oil price shock and 2006
oil price shock, the Arab Spring, increasing ISID terrorism), oligo-
polistic behavior in refinery and redistribution, production lags,
and the structure of market competition. All the aforementioned
factors may generate structural breaks, cause unexpected and
asymmetric responses in the behavior of economic agents, hence
distorting the “linear” world. Under these circumstances, the pri-
ces of the strategic economic commodities, namely oil and pre-
cious metals, are expected to exhibit a more complex behavior
than a simple and stable relationship.
According to the linear ARDL model and the traditional Granger
causality testing procedure; series are assumed to be linear. As
stated in Anoruo (2011), one of the shortcomings of the linear
causality tests is that they are unable to detect non-linear re-
lationships whether it exists. As mentioned above, macroeconomic
data in the real world follow a pattern with breaks and in addition
to this, oil and gold prices follow a nonlinear pattern. Combining
this structure with the additional reasons mentioned above, we
will use nonlinear models; ARDL and non-linear causality tests.
The second part of the work is comprised of literature, the
relationship among variables is given in the third part. Fourth
section is devoted to the data and econometric methodology.
While econometric discussion is the fifth section of the paper, the
last part is the conclusion.
2. Literature
Baur and Tran (2012) and Escribano and Granger (1998) ana-
lyze the long run relationship between gold and silver prices. Baur
and Tran (2012) analyzed a sample period from 1970 to 2010 and
examine the existence and stability of a long run relationship by
following Escribano and Granger (1998). Escribano and Granger
(1998), by using monthly data from 1971 to 1990, found coin-
tegration has occurred during some periods and especially during
the bubble and post bubble periods. In addition to that, Baur and
Tran (2012) studied the role of bubbles and financial crises for the
relationship between gold and silver.
Morales and Andreosso-O’Callaghan (2011) found that gold
dominates precious metals for volatility spillover. Sensoy (2013)
investigated the dynamic relationship among four precious metals,
namely; gold, silver, platinum, palladium, between 1999 and 2013.
According to his findings, gold shows a unidirectional shift con-
tagion effect on other precious metals, in addition to this; silver
has a unidirectional shift contagion effect on platinum and
palladium.
Cochran et al. (2012) found that, following the 2008 crisis, the
volatility of gold platinum and silver returns have increased. Their
finding is inconsistent with the study by Vivian and Wohar (2012)
who did not find any exceptional volatility increase during the
crisis.
Cashin et al. (1999), Hammoudeh and Yuan (2008), Lescaraoux
(2009) Soytas et al. (2009), Sari et al. (2010), Narayan et al. (2010),
203
Zhang and Wei (2010), Šimáková (2011), Wo and Hui (2012), Hsiao
et al., (2013) and Naifar and Dohaiman (2013) are other studies
that examine the relationship among gold and oil.
Cashin et al. (1999), by using the data of seven commodities
among 04.1960 and 11.1985, found a significant correlation be-
tween oil and gold.
Hammoudeh and Yuan (2008), by examining the volatility
behavior of three metals: gold, silver and copper; found that oil
shocks had calming effects on precious metals excluding copper.
Lescaroux (2009), investigating the correlations among crude oil
and precious metals, states, most studies report that they tended
to move together.
Sari et al. (2010) particularly concentrates on the impact of oil
price shocks over gold, silver, platinum and palladium by using the
data of U.S. over 01.1999-10.2007. He found a weak asymmetric
relationship among gold and oil prices. On contrary to this result,
Soytas et al. (2009) investigated the long run and short run im-
pacts of gold and silver prices on oil price. The linear causality
approach of Toda-Yamamoto is applied to the data between
05.2003- 03.2007 but no causal relationship can be found.
Narayan et al. (2010) examine gold and oil spot and future
markets, concluding that; gold is a hedge against inflation and oil
market can be used to predict gold market bi-directionally.
Zhang and Wei (2010) investigated the causality between crude
oil and gold market over the period January 2000 and March 2008.
They found out a consistent trend between crude oil and gold
price. Oil price linearly Granger causes the volatility of gold price
but changes in gold price do not linearly cause oil price volatility.
Šimáková (2011) focuses on the relationship between oil and
gold prices. The existence of long run relationship between vari-
ables is shown by using Granger causality test, Johansen coin-
tegration test and VECM.
Wo and Hui (2012) examine the nonlinear dynamic relation-
ship among USD/yen, gold futures, VIX, crude oil and several stock
indexes. According to their findings, the role of gold is determined
according to crude oil price. From this aspect; as the price of crude
oil is low, gold exhibits the hedging function; when price of oil is
high, gold is both a hedge and safe haven for developing countries.
Hsiao et al., (2013) investigated the correlation among oil pri-
ces, gold prices and exchange rates over the period between
09.2007 and 12.2011. They conclude that the variables are con-
siderably independent.
Naifar and Dohaiman (2013) tested the nonlinear structure of
oil prices by using several econometric methods and stressed the
explanatory power of linear models. They compare and contrast
linear models with regime switching models over the criteria of
linear models' stationary distributions versus regime switching
models' combinations of parametric distributions whose prob-
abilities depend on unobserved state variables.
Shortly, most of the studies explaining the link between gold
and oil prices use inflation channel. As oil price rises, it leads to an
overall increase in prices. The overall uncertainty at financial
markets leads economic agents to buy gold as a hedging instru-
ment. Hence, this explains the safe haven motivation.
3. Co-movement of oil and precious metals
Volatility of oil and gold prices are important due to both their
impact on each other and other metals. Oil prices, as stated in the
introduction, fluctuate depending on many variables. Fluctuations
in oil prices affect precious metals. In this context, gold can be
ascribed a special place in precious metals.
Gold is one of the most important precious metals that contain all
the roles as a store of value and means of exchange. With these
characteristics, gold is seen as a safe haven, especially in times of
204 M.E. Bildirici, C. Turkmen / Resources Policy 46 (2015) 202–211
Fig. 1. Price changes of gold in the world (per ounce).
crisis. Although gold exhibits daily or weekly price volatility, the long-
term price trend is important in reinforcing its safe-haven property.
Fig. 1 shows the change of daily gold prices per ounce; as seen
in the figure, gold remains as a safe haven in the long term, though
short-term price fluctuations exist. During I. and II. oil crisis, gold
prices have increased significantly, followed a relatively flat pat-
tern till 2005 and began to rise afterwards. It should be noted that,
oil prices has also faced with price increases at that period.
The increase in gold demand should also be taken into account
due to the fact that gold is both a consumer good and luxury good.
The consumer good property should be taken into account while
examining the price movements. Moreover, the effects of the
presence of electronic gold transfers and availability of gold ac-
counts in the banks should be considered
In Fig. 2, yearly gold demand is shown according to its com-
ponents. The blue line indicates demand for gold as jewelry, red
line indicates gold demand for investment purposes and lastly, the
gray line depicts gold EFT. According to the figure, stable demand
trend is seen between 2004 and 2008, but after the 2008 crisis,
increase in the demand for gold led to price increases. According
to the gold report in 2013, total demand in 2013 has fallen 15
percent in terms of tones, and 28 percent in terms of U.S. Dollars.
The relationship between oil prices (right axis) and gold prices
(left axis) is shown in Fig. 3. Fig. 4 has been drawn in the same
manner as Fig. 3; showing the price relationships between copper,
silver and oil.
According to Fig. 5, the differentiation among the relationship
between copper and gold is observed. Following the crisis after the
2008 crisis; while gold prices rose rapidly, a similar movement in
copper prices is unprecedented.
4. Data and econometric methodology
4.1. Data
All of the data set used in this study was obtained from the
World Bank World Development Indicators for the period from
1973:1 through 2012:11 monthly for price of oil, gold, silver and
copper. Oil price is measured as op ¼log(OPt/OPt  1) and other
variables were calculated as x ¼log(Xt/ Xt  1).
Fig. 2. Yearly gold demand (in terms of tones).
Gold price is expressed in US Dollar per troy ounce for 99.5%
fine gold at London afternoon fixing average of Daily rates. Price
data on oil is equally weighted average spot price of Brent, Dubai
and West Texas Intermediate, expressed in US Dollar per barrel.
Copper price is expressed in US Dollars per meter and trades at
London Metal Exchange- (Grade A, minimum 99.9935% purity,
cathodes and wire bar shapes, settlement price). Silver price is
expressed in US cents per troy ounce and sourced from Handy and
Herman (99.9% grade refined, New York)
4.2. Methodology
Nonlinear ARDL models, Hiemstra and Jones (1994), and Kyrt-
sou and Labys (2006) causality tests are used in this study. In order
to emphasize the nonlinear nature of the data, BDS test is used.
4.2.1. BDS test
The most popular test for detecting nonlinearity is the Brock
et al. (1987) (BDS) Test, which is designed for testing the null
hypothesis of independent and identical distribution (iid) in order
to detect nonlinearity and non-random chaotic dynamics. BDS test
can be used to detect the remaining dependence and the presence
of omitted nonlinear structure when it is applied to the residuals
from a fitted linear time series model. One advantage of the BDS
test is that it is a statistic which requires no distributional as-
sumption on the data to be tested. Moreover, Brock et al., (1991)
and Barnett et al., (1997) determined that the BDS test is powerful
against a wide range of linear and nonlinear alternatives. It is
possible to write down the procedures of the BDS Test (see Bildirici
and Turkmen (2014) and Zivot and Wang(2003)) as follows:
Given a time series xt for t¼ 1,2,3,…,Z and consider its m history
as xtm = (xt , xt − 1, ... xt − m + 1)
The correlation integral at dimension m can be estimated as
follows:
1
Cm, ∈ = Z (Z − 1) ∑m ≤ s ≺ z ≤ Z ∑ I (xtm,xsm; ∈ ) where, Zm ¼Z  m þ1
m m
and I(.) is the indicator function which is equal to one if
xt − i − xs − i ≺ ∈ for I ¼0,1,….,m  1 and zero otherwise.
It is estimated the joint probability as follows:
Pr ( xt − xs ≺ ∈ , xt − 1 − xs − 1 ≺ ∈ , .... , xt − m + 1 − xs − m + 1 ≺ ∈ )
 M.E. Bildirici, C. Turkmen / Resources Policy 46 (2015) 202–211 205

Fig. 3. Price changes of gold and crude oil.

The BDS test statistic can be stated as: noise term and where φ+ = − δγ + and φ− = − δγ −
m
Cm, ∈ − C1, ∈
where sm,ϵ is the standart deviation of The analysis in this study is finalized in in three steps.
BDSm, ∈ = Z sm, ∈

Z C m, ∈ − C1,m∈.
Under fairly moderate conditions the test converges (1) The long run relation between the levels of variables, yt , xt+, xt−
in distribution to N(0,1). is explored by means of a modified F tests. δ = β + = β − joint null
is tested
4.2.2. Nonlinear ARDL (2) Long run symmetry (β = β + = β −) and short run symmetry
Following Pesaran et al. (2001), Shin et al. (2009), Nimmo et al. m m
( φi+ = φi−or ∑i = 0 φi+ = ∑i = 0 φi− ) can be tested by using standard
(2010,2013), Karantininis et al. (2011), Katrakilidis and Trachanas Wald tests. The null hypothesis of no cointegration among the
(2012), Bildirici (2013) and Bildirici and Turkmen (2014) consider variables ( H0: δ = β + = β − = 0) which imply no long-run re-
nonlinear ARDL model. Nonlinear ARDL model is essentially an lationship, can be tested by the bounds test of Pesaran et al.
asymmetric extension of the linear ARDL approach to modelling (2001).
long-run levels relationships developed by Peseran et.al. (2001). (3) Lastly, the standard asymmetric cumulative dynamic multiplier
ρ κy ρ κy
It is possible to write ARDL model as follows: effects, which are defined as; zρ+ = ∑i = 0 κxt ++i and zρ− = ∑i = 0 κxt +−i
t t
i¼ 0,1,2,… can be used by using the asymmetric ARDL model.
m−1 m
Δyt = c + δyt − 1 + βxt − 1 + ∑ Bi Δyt − i + ∑ γi Δxt − i + εt
i=1 i=0 (1) If ρ → ∞ then, zρ+ = γ + and zρ− = γ −. The asymmetric long run
coefficients are measured as γ + = −β + /δ and γ − = −β −/δ
In this paper, it is considered the following nonlinear coin- The NARDL model accounts for the asymmetric short-run dy-
terpreting regression yt = γ +xt+ + γ −xt− + ut , where γ + and γ −are the namics through the distributed lag part and the asymmetric long-
associated long run parameters and xt is a kx1 vector of regressors
run dynamics via a single common cointegrating vector. The
decomposed as NARDL model provides greater flexibility in relaxing the assump-
xt = x 0 + xt+ + xt− (2) tion of same order integration of time-series data; it allows for
combinations of I(1) and I(0) variables. Besides its estimation
where, xt+ and xt−are partial sums of positive and negative changes simplicity, In addition to that, distinguishing between the absence
in xt of cointegration, linear cointegration and nonlinear cointegration
t t is possible. Lastly, it performs better in testing for cointegration in
x+ = ∑ Δxi+ = ∑ max (Δxi , 0) small samples.
i=1 i=1 (3) As stated in Pesaran and Shin (1998) the ARDL model is known
to correct perfectly for the endogeneity of I(1) regressors On the
t t other hand, if the decomposed series are not I(1) then the degree
x− = ∑ Δxi− = ∑ min (Δxi , 0) to which any endogeneity is corrected will depend on the degree
i=1 i=1 (4)
of persistence
After inserting these into the ARDL model, nonlinear error
correction model between variables becomes as follows: 4.2.3. Nonlinear Granger causality tests
m−1 m
With the help of the standard linear Granger causality test
Δyt = c + ∑ Bi Δyt − i + ∑ (φi+Δxt+− i + φi−Δxt+− i) + δyt − 1 Granger (1969), any possible linear relationship between two
i=1 i=0 stationary variables is investigated. The existence of univariate
+ β +xt+− 1 + β −xt−− 1 + εt Granger causality in that manner implies that a time series of Xt
(5)
Granger causes a time series Yt whether the past of Xt helps to
Where, Δ and εt are the first difference operator and the white forecast the future of Yt after controlling for the past of Yt.

Fig. 4. Price changes of silver, copper and crude oil.

206 M.E. Bildirici, C. Turkmen / Resources Policy 46 (2015) 202–211

Fig. 5. Price changes of copper, gold and silver.

On the other hand, if bivariate Granger causality is investigated, the test;

which involves estimating the kth order VAR Model, the variable Suppose X stands for the residual series when the crude oil
considered Granger causes the other whether the joint sig- price change acts as the dependent variable and respectively Y
nificance of the parameters associated with the lagged values of implies the residual series when the precious metal price change is
the variable considered are given. Hence, if both sets of parameters the dependent variable.
are jointly significant, then there is evidence for causality.
Since economic and financial series may exhibit nonlinear Xtm = ( Xt , Xt + 1, ....... Xt + m − 1), m = 1, 2, ... ,
pattern due to high volatility and crises, standard linear Granger
causality test may be inappropriate. In addition that, according t = 1, 2, ...
to Varsakelis and Kyrtsou (2008) any evidence for causality re- XtLx
− Lx = ( Xt − Lx , Xt − Lx + 1, ....... Xt − 1), Lx = 1, 2, ... ,
lationship does not reveal information about the direction of the
t = Lx + 1, Lx + 2, ...
shocks and the absence of any symmetric causality relation does
not exclude the existence of causality when nonlinearity and signs YtLy
− Ly = ( Yt − Ly, Yt − Ly + 1, ....... Yt − 1), Ly = 1, 2, ... ,
of causal effects are taken into consideration. t = Ly + 1, Ly + 2, ... (6)
Due to the fragility of our price series which are concerned in
our models, we adopt the nonlinear and asymmetric causality test Ly Ly
if Pr (‖Xtm − Xsm ‖≺e, ‖XtLx Lx
− Lx − Xs − Lx ‖≺e , ‖Yt − Ly − Ys − Ly ‖≺e )
developed by Hiemstra and Jones test (1994), modified Baek and
Brock (1992) and Kyrtsou and Labys (2006). = Pr (‖Xtm − Xsm ‖≺e ‖XtLx Lx
− Lx − Xs − Lx ‖≺e )
There are two reasons beneath using two different nonlinear
it means; oil price changes does not nonlinearly Granger cause a
causality tests. First of all, Hiemstra and Jones (1994) test, modified
change in precious metal prices. Also suppose if,
Baek and Brock (1992) reveal information about the positive and
negative nature of the shocks. In addition to this, while Hiemstra–
Jones nonparametric test is free of distribution assumptions, (
C1(m + Lx, Ly, e ) = Pr ‖Xtm−+LxLx − X sm−+LxLx ‖≺e , ‖YtLy
− Ly
− Y sLy− Ly ‖≺e )
Kyrtsou–Labys parametric test enables the detection of any pos-
sible asymmetry in the response of a variable to another. The other
C 2 (Lx, Ly, e ) = Pr ‖XtLx (
− Lx
− XsLx− Lx ‖≺e , ‖YtLy
− Ly
− Y sLy− Ly ‖≺e )
reason is a cross validation of the results. (
C3 (m + Lx, e ) = Pr ‖Xtm−+LxLx − X sm−+LxLx ‖≺e )
(
C4 (Lx, e ) = Pr ‖XtLx
− Lx
− XsLx− Lx ‖≺e ) (7)
4.2.3.1. Hiemstra–Jones test. Due to the aforementioned nature of
the linear causality tests, Baek and Brock (1992), concluded that C1(m + Lx, Ly, e ) C3(m + Lx, e )
Then, C2 (Lx, Ly, e )
= C 4 (Lx, e )
nonlinear alternatives to traditional parametric linear Granger caus-
ality test is more powerful especially for the cases where non-
The joint probability is expressed below in Eq. (8).
linearities can emerge such as market microstructure, noise traders,
etc. Hence, inspite of imposing directly a linear functional form,
various non-parametric techniques gained popularity in the litera- C1(m + Lx, Ly , e , n)
ture. Baek and Brock (1992) method is a nonparametric method used 2
for detecting nonlinear causal relations. The method depends on the
=
n (n − 1)
(
∑ ∑ I Xtm−+LxLx , X sm−+LxLx , e )
t≺s
assumption that the variables are mutually i.i.d. But the i.i.d as-
sumption eliminates the time dependence of variables and also it (
• YtLy Ly
)
− Ly, Ys − Ly, e C2 (Lx, Ly , e , n)
does not consider the nature and range of the dependence. From this 2
aspect, Hiemstra and Jones test (1994), modified Baek and Brock
= ∑ ∑ I ( XtLx− Lx , XsLx− Lx , e)
n (n − 1) t≺s
(1992) approach by reducing series' mutually and individually iid
property, hence allowing short term dependence. In other words, • ( YtLy
− Ly, YsLy− Ly, )
e C3 (m + Lx, e , n)
Hiemstra and Jones (1994) test tries to determine the existence of 2
nonlinear dynamic relations among variables by testing. As an al-
= ∑ ∑ I ( Xtm−+LxLx , X sm−+LxLx , e)C4 (Lx, e, n)
n (n − 1) t≺s
ternative, Diks and Panchenko (2006) developed a new test statistic
2
that takes the possible linear and nonlinear effects of cointegration = ∑ ∑ I ( XtLx− Lx , XsLx− Lx , e)
n (n − 1) (8)
into account “If the series are cointegrated, then causality testing t≺s

should be based on a Vector Error Correction model (VECM)

rather than an unrestricted VAR model” (Engle and Granger, 1987). Where t , s = max (L x, L y ) + 1, ............... T − m + 1, n
When cointegration is not modelled, it leads to detecting linear and = t − max (L x, L y ) − m + 1
nonlinear causality between variables. In other words, efficiency
And function I (X , Y , e ) takes value is 1 when the maximum
hypothesis will suffer damage due to absence of cointegration re-
norm vector X and Y proves within the given parameter e and
lationships (Dwyer and Wallace, 1992).
0 otherwise.
By adopting Hiemstra and Jones (1994) method for conducting
 M.E. Bildirici, C. Turkmen / Resources Policy 46 (2015) 202–211 207

a
⎡ C1( m + L x, L y, e) C3 ( m + L x, e) ⎤ Kyrtsou-Labys test statistic can be calculated. In investigating
W= n⎢ = ⎥ whether positive returns in X cause Y, the procedure is then re-
⎢⎣ C2 ( L x, L y, e) C4 ( L x, e) ⎥⎦
peated, with the order of the series reversed and again with the
(
∼ N 0, σY2 ( m, L x, L y, e) ) (9) subset of observations that correspond to non-positive returns
(Varsakelis and Kyrtsou, 2008).
If W follows the asymptotical normal distribution as stated in From this aspect, sign conditioning is chosen due to its practical
Eq. (9), then we may say the change of precious metal prices does advantages. Additionally, the nonpositivity, or nonnegativity sub-
not nonlinearly granger cause the change of oil prices only if set is not the only possible way of conditioning, other events such
m , L x, L y ≥ 1, e≻0 and stationary and dependent residual series Y as start/end of the week, price movement thresholds can also be
and X is given. used.
Let CS be the difference between the two ratios in, i.e., As stated in Varsakelis and Kyrtsou (2008) detection of Kyrt-
CS ¼(C1/C2)  (C3/C4). The null of no causality is not rejected when sou-Labys causality relationship gives information on the sig-
CS is relatively close to zero. Under the assumption that {Xt} and nificance of a positive or negative shock. From this aspect, it is a
{Yt} are strictly stationary, the asymptotic distribution of CS can be way to “sharpen” the usual version of causality testing in which
standardized as TVAL = n × CS/ σ 2  N (0,1). the series being tested are considered in their entirety.
According to Baek and Brock (1992), the removal of linear
predictive power from a linear VAR model results ina kind of
nonlinear predictive power defined as any remaining incremental 5. Econometric results
predictive power of one residual series for another.
In order to test for cointegration and causality relationship
4.2.3.2. Kyrtsou-Labys (2006) Test. Kyrtsou-Labys (2006) Test with between oil and precious metal prices, the econometric procedure
Mackey–Glass model (M–G hereafter) is an extension of nonlinear implemented is as follows. The empirical analysis includes Unit
Granger causality test. Statistically significant M–G terms suggests Root Test, BDS test, nonlinear ARDL and nonlinear Granger caus-
a nonlinear feedback as the generating mechanism of the inter- ality tests.
dependences between X and Y. The nonlinear causality test based
on M–G model tries to find out any significant nonlinear effect 5.1. The results of unit root tests and BDS test
caused by past samples of variable Y over variable X. Operationally,
the test is similar to the linear Granger causality test, except that The method is applied on the following empirical model;
the models fitted to the series are M–G processes. ln xt = f (ln op+ , ln op−), where ln op+ and ln op−are the partial
Varsakelis and Kyrtsou (2008) and Kyrtsou and Labys (2006) sums of the positive and negative changes of oil price. ARDL
created the M–G model. The model in these studies can be ex- method, can be used irrespective of the regressors' order of in-
plained as follows; tegration but it must be ensured governmens that variables are
Xt − τ1 Yt − τ2 not I(2).
Xt = a11 − δ11Xt − 1 + a12 − δ12 Yt − 1 + εt The unit root tests are used to determine whether the variables
1 + Xtc−1τ1 1 + Ytc−2τ2
Xt − τ1 Yt − τ2 are I(0) or I(1). First, the order of integration of the long-run re-
Yt = a21 − δ 21Xt − 1 + a22 − δ 22 Yt − 1 + ut lationships among the variables is defined using ADF and ERS unit
1 + Xtc−1τ1 1 + Ytc−2τ2 (10)
root tests. According to the results stated in Table 1 below, ADF and
Where ut , εt ∼ N (0, 1) , t = τ , ..... , N , τ = max (τ1, τ 2), X0 , .... X τ − 1, Y0, .... Yτ − 1 ERS unit root tests conclude that the OP, GP, SP and CP variables for
and αij, and δij are the parameters to be estimated, τi are integer countries are stationary in the first differences.
delays, and ci are constants. As stated in Pesaran and Shin (1998) the ARDL model is known
Kyrtsou-Labys test is carried in two steps; first the un- to correct perfectly for the endogeneity of I(1) regressors On the
constrained model of the given series is estimated by using OLS. In other hand, if the decomposed series are not I(1) then the degree
the second step, a second M–G model under the constraint of to which any endogeneity is corrected will depend on the degree
“α12 ¼0” is estimated in order to test for causality. Kyrtsou-Labys of persistence.
test statistic, which follows an F distribution, can be derived from
the SSRs of the constrained and the unconstrained model, such 5.2. BDS Results
(S − S ) / n
that; SF = S /c (N −u n restr
− 1)
∼ Fnrestr , N − nfree − 12
u free

If the test statistic is greater than a specified value, then we Table 2 indicates all the test statistics are greater than the cri-
reject the null hypothesis that Y causes X. tical values significantly. Thus, the null hypothesis of i.i.d. is re-
The test requires prior selection of the best delays (τ1 and τ2) jected at 5% significance level. The results strongly suggest that the
on the basis of likelihood ratio tests and the Schwarz criterion. In series are non-linearly dependent at all dimensions.
addition to testing symmetric effects in the way explained above, if
one is interested in investigating the causal relationships in an 5.3. ARDL and NARDL results
asymmetric manner, in other words whether those relationships
hold between the identified pair when conditioning for positive or We tested the existence of cointegration via using
negative returns, should set conditions on the causing series being
nonnegative or nonpositive. Table 1
Unit root test results.
Briefly, to test whether nonnegative returns in the series Y
cause the series X, an observation (Xi,Yi) is included for regression ADF ERS
only if Y(t  τ2) Z 0. In the second step constrained model will be
estimated by the same restriction mentioned above, by this way Level First Diff Level First Diff

OP  0.00003  19.533 24.82774 2.282510

GP  0.048  26.992 7.848038 0.393326
2
Assuming; nfree is the number of free parameters in our M–G model and SP 0.00108  8.765 5.451738 1.729767
nrestr-1 is the number of parameters set to zero when estimating the constrained CP 0.0052  5.876 7.24785 0.139870
model. Further information can be found in Varsakelis and Kyrtsou (2008).
208 M.E. Bildirici, C. Turkmen / Resources Policy 46 (2015) 202–211

Table 2 Table 3b
BDS test results. NARDL estimation resulta.

BDS test statistic Model 1 Dependent Model 2 Dependent Model 3 Dependent

Embedding dimension (m) variable: GP variable: SP variable: CP

2 3 4 5 6 lnx 0.846680(2.148) 0.805817(1.895) 0.81175(2.48)

ln op þ 1.0278(11.53) 1.07173(2.724) 3.2388(2.924)
OP 50.05233 53.22617 57.21670 63.17123 71.38874 ln op  0.4791(1.9298) 0.53514(2.339) 4.51876(1.936)
GP 43.49161 46.20860 49.73710 54.97142 62.16631 Δlnxt − 1 -0.17998(2.11)nn -0.1001(2.11)nn -0.09945(2.11)nn
SP 44.90098 47.23889 50.12260 54.40723 60.23954 Δlnopt+− 1 0.102(2.133)nn 0.045(1.911)nnn -0.1001(3.21)n
CP 52.82386 55.15439 58.01877 62.36797 68.38484
Δlnop−
t−1
-0.332(1.89)nnn -0.019(0.036) 0.0413(1.769)nnn
+
Lop 1.214 1.33 3.99
− 0.5659 0.6641 -5.5667
Lop
R2 0.736412 0.674386 0.806116
Table 3a
WLR 16.11 58.68 11.780
Bounds test results.
WSR 20.45 4.684 6.059

Dependent variable F statistic a

L op+ and L op− denote the long-run coeffcients associated with positive and
negative changes of oil price. WLS refers to the Wald test of long-run symmetry (i.e.
Linear Nonlinear
L op+ ¼ L op− ) while WKS denotes the Wald test of the additive short run symmetry
condition. It is given t value in parenthesis short-run coefficients are accepted at a
GP 1.981 5.1308
significance level of
SP 2.001 5.18 n
1%
CP 1.856 4.788 nn
5% and
Outcome No-cointegration Cointegration nnn
10%

n
unrestricted error correction model. Δln yt = co + ∑i = 1 Ai Δln yt − 1
m
opt − 1 + C1 ln yt − 1 + C2 ln opt − 1 + et (yt is a representa-
+ ∑i = 0 Bi Δln
tive for GP, SP and CP). The lag structure of the model is chosen
based on the Schwartz Information Criterion as suggested by Pa-
seran et.al (2001).
As it is seen in the Table 3a, there is evidence in favor of the
non-rejection of the null hypothesis of no cointegration. This re-
sult may be due to the nunlinear structure of the variables. Con-
ditionally, the results of the nonlinear ARDL model should be
investigated.
First of all, we tested the following model;
m−1 m
Δ ln xt = c0 + ∑ βi Δyt − i + ∑ (φi+Δopt+− i + φi−Δopt−− i ) + δyt − 1
i=1 İ=0
+ β +opt+− 1 + β −opt−− 1 + εt
Table 3a shows that the results obtained determine statistically
significant evidence in favor of the existence of a long run coin-
tegrating relationship.
From the bounds test, since the F statistics, exceed the critical
upper bound, we come to the conclusion that the three variables;
GP, SP and CP, investigate in the long run nonlinearly.
Table 3b exhibits the results of the short and long-run sym-
metry tests for pairs of oil price and precious metal prices. The
existence of any long and/or short run asymmetric relationship
can be detected by Wald test. Wald test for short-run symmetry
and the Wald test for long-run symmetry are shown as WSR and
WLR. According to the results, the Wald tests are able to reject the
null hypothesis of no long run/short run asymmetric correlation
between price changes.
We first concentrated on short run dynamics of the models. The
null hypothesis of symmetry against the alternative of asymmetry
in short run impacts was analyzed with the Wald test. The results
suggest the rejection of the null hypothesis of a weak form sym-
metric adjustment (WSR).
L op+ and L op− in Table 3b indicate that there is a mechanism to
correct the disequilibrium between oil prices and prices of pre-
cious metals. The coefficients of asymmetric long-run multipliers
( L op+ , L op−) are both statistically and economically significant, ex-
hibiting the speed of adjustment to the equilibrium after a shock.
When the long run coefficients of the L op+ and L op− are
investigated for Models 1 and 2, coefficient signs are seen to be
determined as positive. For model 1, the estimated long run
coefficients L op+ and L op− are determined as 1.214 and 0.5659. A %1
increase in the oil price causes a 1.214 rise in gold price and %1
decrease causes 0.5659 decline in gold price. Our results showed
the asymmetric effect for positive change.
The long run relationship among gold and oil reveal that prices
are stickier upwards that support the validity of an asymmetric co-
movement. The evidence of any possible long run relationship
between oil and gold can be explained from several aspects. First
of all, as a primary production input, high crude oil price increases
inflation. On the other hand, gold has an excellent nature to resist
inflation and maintain its value, hence becoming an effective tool
against inflation. So the increase of oil price ends up with a surge
of gold demand and ending up with an increase in its price.
Secondly the main oil exporting countries invest their profits
into gold in order to maintain commodity value, which also in-
crease the gold price parallel to oil price increases. Lastly, gold and
crude oil as the representatives of the large commodity markets,
are influenced by the same eco-political events.
In Model 2, the long run coefficients of Lop are 1.33 and 0.6641.
Positive change in the oil price of 1%, results in an increase of 1.33%
in silver price. The size of the negative long run coefficient is small,
implying a sticky negative change.
Regarding the Model 3, the signs of the long run coefficients
L op+ and L op− are expected to be positive, any opposite case is out of
expectation. From this aspect, for model 3, since the sign of ne-
gative long run pass-through coefficient is negative, it is left be-
hind for our analysis. Moreover, although L op+coefficient is econ-
ometrically significant, if its magnitude is considered, we can see
that it is comparably high, showing a 3.99% increase against a 1%
increase in oil price. This high magnitude of long run relationship
between oil and copper can be explained by international trade.
Copper is a metal that is subject to international trade. Industrial
use of copper is higher than silver and gold and due to its dry
bulker property, a 1% increase in oil prices leads to a 3.99% copper
price increase.
This result is contradicts with the findings of the study by
Franses and Kofman (1991), investigating the relationships be-
tween copper, lead, zinc, nickel and aluminum. They conclude that
there is a cointegrating relationship with the copper price, im-
mediately reacting to disequilibrium errors, hence being less
 M.E. Bildirici, C. Turkmen / Resources Policy 46 (2015) 202–211
exogeneous than other metals. In addition to that Cerda (2007)
identifies the most important effect over the price of copper dur-
ing the period between 1994 and 2003 is the demand from large
economic blocks.
To sum up, first noticeable observation is changes in oil price
are passed through gold and silver in the long run and the effects
are much more pronounced when the oil price increases.
It is worth noting that the behavior of the oil price changes is
asymmetric; meaning that economic agents are more willing to
increase the prices of precious metals in the case of a increments
in oil prices, but they are less sensitive to decreases in oil prices.
This finding supports the validity of imperfect market structure.
The asymmetric short-run coefficients of precious metal prices
are smaller than 1% and are accepted at a significance level of *1%,
**5% and ***10%. As for the short run, our results provide evidence
for the presence of asymmetry. From table 3 we observe that a
negative change in oil price ( Λopt−− 1 ) is not significant in model 2,
between oil price and silver price. However it is significant in the
case of gold and copper, indicating an immediate decline of 0.3%
and 0.04% in gold and copper prices.
When the opposite case of a positive change in oil price is
considered ( Λopt+− 1 ), the coefficient for silver price turns out to be
significant. On the other hand the coefficient for copper price
becomes negatively signed. Although the short run elasticity
coefficients of copper price are statistically significant, it is eco-
nomically meaningless. Due to the fact that copper is only used in
production instead of being used as a means of exchange or store
of value, this result is not surprising. By the same way, silver is
exhibiting only the property of being a luxury good; any condition
resulting in a gold price decrease is also effective on silver prices.
Regarding the responses of the gold prices to the oil prices, we
uncover a co-movement relationship in the short-run. On contrary
to long run pass-through coefficients, the effects of changes in the
gold prices are much more pronounced in the case of a fall than
when the prices go up.
Sarı et al., (2007) found that oil and silver were shortly related
in developed countries and they also displayed the inner re-
lationship mechanism of oil and precious metals. Ciner (2001)
state that, the long-term relationship between gold and silver in
Tokyo Commodity Exchange is absent in 1990's.
On contrary to these results, Zhu et.al (2015) state that, inter-
national oil price is an important factor for precious metal prices
volatility in long and short term. Zhang and Wei (2010) state that
the relation coefficient of prices of gold and oil was 0.9295, in
addition to that these economic commodities exhibit a long-term
equilibrium relationship. In the study by Sari et.al (2010), a weak
long-term equilibrium relationship among precious metal prices,
oil prices and exchange rate was found. Comparing these results
with our findings, our findings indicate that the impact of oil price
increases over metal commodity price changes is larger than that
the impact caused by oil price decreases. Shortly, the changes in oil
price are passed through to gold in the long run for positive and
negative changes in oil price. The long run relationship among
gold and oil reveal that prices are stickier upwards that support
Table 4
Hiemstra–Jones causality test results.
Laga Δop-Δ gp Δgp-Δop
1 5.15020 2.29140
2 0.8418 3.7682
3 1.08615 0.7618
4 1.81746 2.01746
5 0.92465 1.007642
6 1.05642 1.117642
a
We consider the null hypothesis that A does not cause B.
209
the validity of an asymmetric co-movement.
5.4. Causality results
The non-linear ARDL method does not indicate the direction of
causality, but there is a long-run relationship among oil price and
other variables. The main reason beneath using two different
nonlinear causality tests of; Kyrtsou- Labys test with Mackey–
Glass model and Hiemstra–Jones test, is due to attempting a cross-
validation.
5.4.1. Results from the Hiemstra–Jones test
Table 4 presents the results from the Hiemstra–Jones test,
based on the residuals of a VAR model. According to non-linear
ARDL results, at least a single directional causality relationship
must exist.
Table 4 presents the empirical results from Hiemstra–Jones's
nonlinear causality test for lag lengths of one to six lags. We de-
termined bi-directional causality between gold and oil price.We
find significant unidirectional Granger causality running from oil
price to silver price. An interesting result, it was determined
among oil and copper, for the pair of op and cp, the null hypothesis
of no causality is strongly rejected at first two lags, in both ways.
This result, implying a bidirectional relationship, is out of our ex-
pectations in such a manner that any price movement from cp to
op should not have any meaning characterized “strongly”. One
possible explanation may be the non-parametric structure of the
model.
5.4.2. Results from the Kyrtsou–Labys tests
At Table 5, the symmetric and asymmetric results from non-
linear Granger causality test are shown. As stated in Diebolt and
Kyrtsou (2006), when nonlinear causality is identified, there is a
strong possibility that a small variation in one variable can lead to
an abnormal behavior of the others. We first carry out the sym-
metric version of the nonlinear Granger causality test, and report
the results at the first row. The results of the symmetric case im-
plies that there is evidence for bidirectional presence of synchro-
nicity for causality between oil price (op) and gold price (gp) and
oil price (op) and silver price (sp). By contrast, in the third case of
oil and copper; there was no evidence of nonlinear Granger
causality both for the symmetric and asymmetric cases, in other
words, our findings show no causality in both directions for the
variables (op and cp) at the conventional levels of confidence.
Considering the results of different causality tests, divergent con-
clusions over the relationship between op and cp has emerged.
Although Kyrtsou–Labys test results determine a unidirectional
relationship for the asymmetric positive case, no causality has
emerged for symmetric and negative case.
There is a significant bidirectional causality between op and gp
in positive and negative changes. In addition to that, when op and
sp pair is considered, we examine a unidirectional causality run-
ning from positive changes in oil price to changes in silver price.
Generally speaking, the fact that negative changes in silver prices
Δop-Δ sp Δsp-Δop Δop-Δ cp Δcp-Δop
8.12135 0.9156 11.4256 3.1856
2.1752 0.0576 4.1862 3.05276
0.1946 1.0364 0.0056 1.1752
3.0012 1.0561 2.01156 7.01872
1.00782 0.0017 0.8715 0.04657
0.7146 0.1816
210 M.E. Bildirici, C. Turkmen / Resources Policy 46 (2015) 202–211
Table 5
Kyrtsou–Labys causality test resultsa, b
Symmetric case Asymmetric Asymmetric
F-statistic (P) case F-statistic (N) case F-statistic
Δop-Δgp 3.245* 4.84* 3.956*
Δgp-Δop 3.23* 4.21* 1.001
Δop-Δsp 3.789* 3.184* 0.891
Δsp-Δop 3.643* 0.21 0.16
Δop-Δcp 0.1789 0.184 0.22
Δcp-Δop 0.1643 0.21 0.16
a
We consider the null hypothesis that A does not cause B. An asterisk indicates
significance.
b
Asymmetric (P) and Asymmetric (N) indicate asymmetric case for positive
and negative changes in the causing variables, respectively.
do not lead oil price changes implies that the information con-
tained in negative precious metal price shocks cannot significantly
improve the ability to predict the oil price changes.
Considering the results of different causality tests, divergent
conclusions over the relationship between op and cp has emerged.
Although Kyrtsou–Labys test results determine a unidirectional
relationship for the symmetric case, no causality has emerged for
positive and negative case.
Our results reinforce the related literature in showing that oil
prices and gold prices interact in a nonlinear manner. This finding
implies that, economic actors can take the price movements in
these two markets into account in order to promote stability and
economic growth. This empirical evidence appears to be parallel to
the results of Narayan et al. (2010) and Lescaroux (2009). When
gold and oil spot price relationship is considered, it is seen that
they are affecting each other bi-directionally. Additionally, some
unidirectional nonlinear causal linkages occur in the Kyrtsou–La-
bys case. The Hiemstra and Jones results imply that causality can
vary from one direction to the other at any point in time, hence
implying a changing pattern time.
By the way, it can be safely concluded that, both gold and oil
markets play an important role in price discovery process in this
respect. Our models partially captured the nonlinearity between
oil and gold markets and oil and silver markets statistically sig-
nificant at lower-order moments, but this is not supported in the
case of copper and oil price relationship.
6. Conclusions
The market dynamics of oil and precious metal prices have
gained attention in recent years. In this article, we investigated the
relationship between the oil and three precious metal price,
namely gold, silver and copper by NARDL model in order to cap-
ture the asymmetric responses of their prices to negative and
positive changes in the oil price and both over the short- and the
long-run.
Using monthly data for the period 1973-2012, we find that the
oil prices have long-run asymmetric effects on precious metal
prices. Changes in oil price are passed through to gold in the long
run for positive and negative changes in oil price. The long run
relationship among gold and oil reveal that prices are stickier
upwards that support the validity of an asymmetric co-movement.
Another noticeable observation is changes in oil price are passed
through silver in the long run and the effects are much more
pronounced when the oil price increases. For the case of copper,
Lop−is insignificant and positive long run pass-through coefficient
is higher than gold and silver, which can be explained by inter-
national trade.
The short run elasticity coefficients of copper prices are sta-
tistically insignificant and have signs opposing to other metals.
Due to the fact that copper is only used in production and trade
instead of being used as a means of exchange or store of value, this
result is not surprising.
Kyrtsou–Labys and Hiemstra–Jones causality tests are used
together in order to attempt a cross-validation. With the use of the
M-G model, we concretized non-linearity and hence arrived at
results that can help researchers to understand the relationship
among oil and precious metal prices.
The results of two nonlinear causality tests show divergence at
some time. The main reason of these differences can be explained
by the ways in which the tests are constructed. From this aspect,
while Hiemstra–Jones nonparametric test is free of distribution
assumptions, the Kyrtsou–Labys parametric test enables capturing
any possible asymmetry in the response of a variable to another.
According to the asymmetric Kyrtsou and Labys test (2006)
results, an interesting finding emerges; precious metal prices re-
turns respond nonlinearly to shocks to changes in crude oil prices
only at earlier lags. According to Hiemstra and Jones causality test,
bi-directional causality between gold and oil and copper and oil
and a unidirectional causality running from oil price to silver price
have emerged. In this way, asymmetric Kyrtsou and Labys (2006)
results and nonlinear Granger causality results are different. Al-
though both tests do not provide the same results, the main ar-
gument can be the linear causality tests' inability to provide cor-
rect assessment of the true relationships between variables ana-
lysed with underlying nonlinear nature and may suggest mis-
leading policy actions.
Moreover, it can be concluded that, our models grasped the
nonlinear nature in the price discovery process, hence partially
captured the nonlinearity between oil and gold markets and their
important role in macroeconomy.
As stated above, crude oil is maybe the most strategic com-
modity, probably is an indicator for all price trends and vital for
production processes. Specially, gold is used in various sectors and
is viewed as the most influential metal due to its functions; such
as storage of value, reserve for money, safe haven property as an
anti-inflation shelter and financial investment instrument. From
this aspect, oil and precious metals are considered as leading in-
dicators of inflation. In other words, the pro-cyclical characters of
precious metals provide important information as to where fi-
nance and macro economy are heading.
Similarly, silver is also used in various sectors in production
processes. Further, it can serve as a hedging instrument in in-
vestment portfolios. Accordingly, we can conclude that, due to the
devastating effects of the recent financial crisis, portfolios are re-
allocated. Besides money, precious metals gained importance for
serving as an alternative investment instrument.
The price movements in gold and crude oil can have an impact
on changing the price trends of the whole commodity markets. In
this way, investigating their relationship over price discovery
helps to provide some information for both forecasting the crude
oil price, the gold price and the potential effects on commodity
markets.
The results from this study have important policy implications.
First of all, especially negative oil shocks will be persistent in gold
and silver and positive oil shocks will be persistent in gold prices.
The persistency property in both gold and silver is important for
monetary policy especially with respect to inflation targeting.
Therefore, strong policy measures need to be adopted to ensure
that gold price returns to its original trend.
 M.E. Bildirici, C. Turkmen / Resources Policy 46 (2015) 202–211
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