The persistence of precious metals and oil during the COVID-19 pandemic: evidence from a fractional integration and cointegration approach
2022
Usman, Nuruddeen | Akadiri, Seyi Saint
In this paper, the behavior of precious metals and oil is examined using a fractionally integrated and cointegrated modeling approach. Using daily data from January 2015 to December 2020 and using both endogenous and exogenous structural breaks, we examine the behavior of the related series before and during the COVID-19 pandemic with the aim of investigating whether the degree of persistence has changed since the onset of COVID-19. We found that precious metals and oil exhibit long memory and are mean reverting regardless of the sample considered as the fractional parameter d < 0.5. However, when structural breaks are taken into consideration, an increase in persistence is found during the COVID-19 as compared to the period before it. In addition, the fractionally cointegrated vector autoregressive (FCVAR) model of Johansen and Nielsen (2010, 2012) is used to examine the existence of long-run relationship among precious metals and oil price. We find the integrated parameters at d < 0.5 for all samples except for the pre-COVID-19 sample. This highlights that the FCVAR is a better fit for the full sample and the COVID-19 and the COVID-19 pandemic period sub-samples, as the fractional parameter is d < 0.5 while the CVAR model is better fit for the pre-COVID-19 period where d> 0.5. Both cointegration techniques alongside the parameter stability tests lend support to the existence of a persistence and stable long-run relationships among the series irrespective of the sample period considered. Attendant policy recommendations for investors and policymakers are recommended.
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