Risk Connectedness between Crude Oil, Gold and Exchange Rates in China : Implications of the COVID-19 Pandemic

This study examined the risk connectedness and its asymmetric between oil, gold, and foreign exchange under the realized volatility, spillover index framework, and high-frequency data during the COVID-19 pandemic. It was found that: (1) At the beginning of the COVID-19 outbreak, the total volatility spillover in the system declined, which may indicate that COVID-19 cuts the trading activities in the financial market by inhibiting personnel mobility, to reduce the total risk connectedness; then, the spillover experienced a short-term sharp rise due to panic. (2) The exchange rate volatility spillover had a significant impact on gold and international crude oil, but a restricted effect on domestic crude oil after the outbreak of COVID-19, and these variations of risk transmission caused by COVID-19 emerged later than the outbreak, reflecting a certain lag. (3) The impact of COVID-19 pandemic on the asymmetric risk connectedness between oil, gold and the exchange rate was limited, and the risk transfer resulting from bad news was dominant during the sample period; however, gold was less affected by bad news than the oil and exchange rates. These findings suggested that the establishment of Chinese crude oil futures could restrain volatility spillovers from the exchange rate; the foreign exchange reserve structure should be optimized; the gold proportion should be appropriately increased, and reducing the dependence of oil and gold on the USD could weaken the negative impacts caused by USD exchange rate uncertainty and undesired event like COVID-19