Gold and Exchange Rate Volatility: A Critical Review of Literature and Methodological Advances

Abstract

The current study reviews the gold-exchange rate association with a wider prospect in case of Pakistan. Gold prices have shown a remarkable increase since past few years. Because gold is believed as exchange rate hedge, and instability of Pakistan rupee persists for long hence it is crucial to study gold-exchange rate relationship in Pakistan. The study discusses the great work of literature in context of causality, hedge and safe haven ability, predictive ability and volatility spillover effect of gold and exchange rate to stock indices of micro firms and industries. The study further proposes to examine hedge and safe haven ability of gold and identify impact of gold and exchange rate volatility on stock returns of micro sector using GARCH model. The findings of this study will benefit investors, policy makers and academicians.

Key words: Gold, Exchange rate, Pakistan.