The Causal Relationship Between Stocks, Gold, Crude Oil, and Bond Returns in Poland
The Causal Relationship Between Stocks, Gold, Crude Oil, and Bond Returns in Poland

Summary/Abstract: Theoretical background: Capital investments involve taking risks to achieve a favourable rate of return.Investors are offered various options, including stocks, bonds, and commodities. The aforementioned in-vestment opportunities are considered alternatives due to their varying price volatility and risk levels. Bondsand gold demonstrate a low or negative correlation with equities. On the other hand, crude oil and gold arepositively correlated. An essential issue in analysing financial markets is to capture the dynamic behaviourof the financial time-series data, i.e. variables such as prices and returns on investments in assets mentionedabove. In decision-making, investors should consider the causal relationship between asset classes, as somevariables may contain important information about the future dynamics of other variables. The ability topredict future outcomes is crucial to reduce uncertainty. Vector autoregression (VAR) models are regardedas a useful modelling tool in investigating interrelations between financial instrument prices and returns.Purpose of the article: The paper aims to evaluate the linkages between stock, gold, crude oil, and bondreturns in Poland. We focus on analysing both the long-term equilibrium between logarithmic financialasset prices and the Granger causality between logarithmic returns in the short term.Research methods: The causal relationships between the stocks, gold, crude oil, and bond logarithmicreturns are investigated based on the VAR/VECM estimates. The empirical data cover the period from December 2006 to January 2023. We use the following market data to measure the interrelations betweenthe considered assets: WIG Index, gold and crude oil spot prices, and bond index reflecting the pricemovements on the Polish financial market. We carry out the test for stationarity employing the ADF andPhillips–Perron tests. The pre-estimation process also involves identifying the number of lags and con-ducting the Johansen cointegration test since variables are integrated of order one to examine the existenceof the long-term equilibrium between the logarithmic prices of assets mentioned above. We use the Waldtest for the models’ parameters to indicate the type of Granger causality between logarithmic returns. Theforecast error variance decomposition (FEVD) and impulse response functions (IRF) analysis is also ap-plied. Moreover, the post-estimation procedure includes a test for parameters stability and white noise ofresiduals. All calculations are performed using Stata’s standard software package.Main findings: The results suggest that the markets we examined in Poland are cointegrated, meaninga long-term relationship exists between the prices of financial assets. Additionally, we prove that goldlogarithmic prices have a negative impact on the stock index, indicating an inverse relationship betweentheir price developments. We also discover that crude oil and bonds’ effects on the stock market are posi-tive. Although all β coefficients of the error correction equation are statistically significant, the short-termadjustment to equilibrium did not occur based on the α coefficients of the short-term equations. Accordingto the Granger causality analysis related to the VAR in first differences, gold price changes have a short-term impact on stock returns. In contrast, stock returns cause crude oil returns. However, we find no causallinkages in the remaining cases, suggesting that the variables are independent. Changes in asset prices aremainly attributed to their shocks, while observed impacts described by IFR function patterns die out quitequickly. Overall, results confirm that investors can combine gold and stocks in their portfolios, as theseinterrelated assets have alternative investment properties. Additionally, it is worth noting that the correlationbetween stock returns and crude oil or bonds is undesirable when constructing portfolios.

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