A study of dynamic dependence of gold and gold ETFs on energy ETFs

This study investigates the hedging effectiveness and dependence structure between gold, gold ETFs, and both conventional and clean energy ETFs through copula-based models, including static and time-varying copulas. Daily return data from 2020 to 2023 is employed, with marginal volatilities filtered via GARCH models. Results show gold ETFs exhibit both upper and lower tail dependence with energy ETFs, with Gumbel and Clayton tail dependence coefficients ranging from 0.14 to 0.24 (upper) and 0.01 to 0.14 (lower), respectively. Conversely, gold displays weaker tail dependence, with Clayton lower-tail coefficients near zero for most energy ETF pairs. Time-varying copulas reveal that gold maintains negative average correlations (as low as −0.37) with traditional energy ETFs during crises, highlighting its role as a reliable hedge. These findings suggest that gold serves as a more effective hedging asset than gold ETFs, particularly in turbulent periods, and is especially suited for hedging traditional energy ETF exposures. The study contributes to the literature by integrating GARCH filtering with multiple copula types to capture dynamic, nonlinear, and asymmetric dependencies – a methodologically superior approach for assessing hedging effectiveness. It holds important implications for portfolio managers and risk-averse investors seeking to mitigate energy sector exposure through alternative asset allocations.