The Nexus of the Nikkei 225, Gold, and Crude Oil. Do They Have a Co-movement in the Long Run? New Evidence for Cointegration from the Autoregressive Distributed Lag Bounds Test

This study provides insight into how the Nikkei 225, the Nikkei Volatility Index, gold and Brent crude oil prices, and the exchange rate are related in the long run through the cointegration approach of the Autoregressive Distributed Lag (ARDL) bounds test. For a concrete cointegration result, this study employs both the frequentist and Bayesian estimation approaches. The ARDL results confirm the cointegration relationship between the Nikkei 225, the Nikkei Average Volatility Index, Brent crude oil and gold prices, and the nominal exchange rate between 2008 and 2018. The main findings of this study are (1) Brent crude oil prices play an essential role in explaining the long-term Nikkei index movement. A rise in the price of Brent crude oil increases the cost of production for Japanese firms and hinders their performance. As a result, the Nikkei 225 deteriorates; (2) a depreciation of the Japanese yen can improve stock market performance through the trade channel; (3) higher stock market uncertainties measured by the Nikkei Average Volatility Index hamper the stock market performance.; (4) gold is an asset that investors could use for speculation to store their wealth highly uncertain periods after the global financial crisis. Finally, the error correction model suggests the speed of the correction in the short run is also sensible, around 15%.