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The Macroeconomic Determinants of Precious Metal Volatility. 2010

by on February 10, 2012

There is of course a large body of literature on the determinants of stock and bond volatility. This paper is one of the few that examines the volatility of all 4 precious metals, and seeks to find answers to two questions: first, what are the drivers of this volatility and as an outcome, can we think of there being an asset class of Precious Metals. It does this a monthly frequency that allows for an examination of the long run trends that affect the volatility of these markets.

Testing all financial and monetary variables as a block showed that gold, platinum and palladium volatilities were all affected. Silver volatility however was not affected by the explanatory variables used. When the financial variables. When subsets of variables are used gold shows itself as different from all other PM’s. It is only affected by monetary variables, while the PGM’s volatility is affected by both monetary and financial variables. The authors highlight that this forces the conclusion that silver is not a substitute for gold as is sometimes put forward. When the sample is split the results for silver, platinum and palladium remain unchanged. Gold responds to financial market variable sin each sub period, as well as monetary variables as before.

Volatility spillover between all the precious metals is also seen to be significant. So that gold and PGM’s volatility does seem to affect silver even if the financial and monetary variables do not. In the sub sample analysis these spillover fail to be seen for palladium.

In essence due to these results we might not, at least when considering volatility, consider these four assets as one class; there are distinctly different drivers. The crucial interlinkage of gold and money is again found.

Data: Monthly data January 1986 – May 2006. S+P500 returns and Dividend yeild. World Ex US stock market returns and dividend yeild. US M2. US CPI. Month end returns for Gold, Silver, Platinum and Palladium.

Citation: Batten, Jonathan, Ciner, Cetin, and Lucey, Brian M. (2010), ‘The Macroeconomic Determinants of Volatility in Precious Metals Markets’,Resources Policy, 35 (2), 65-71. and a downloadable version is availalble.

Abstract: This paper models the monthly price volatilities of four precious metals (gold, silver, platinum and palladium prices) and investigates the macroeconomic determinants (business cycle, monetary environment and financial market sentiment) of these volatilities. Gold volatility is shown to be explained by monetary variables, but this is not true for silver. Overall, there is limited evidence that the same macroeconomic factors jointly influence the volatility processes of the four precious metal price series, although there is evidence of volatility feedback between the precious metals. These results are consistent with the view that precious metals are too distinct to be considered a single asset class, or represented by a single index. This finding is of importance for portfolio managers and investors

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