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Rational Speculative bubbles in Gold Futures Market: An application of Dynamic Factor Analysis. Bertus and Stanhouse (2001)

by on November 12, 2012

This paper builds an explicit model of the supply and demand factors the influence the price of gold. This is done in order to estimate its true or fundamental value on a quarterly basis between 1975 and 1998. Factors used by the authors include precautionary demand proxies by movements in the US dollar – Swiss franc FX rate and US inflation, the opportunity cost of holding gold measured by the US 1 month t-bill rate and the oil price which the authors argue influence the price of gold as that countries that earn excess dollars when oil prices are high will use some of these funds to purchase gold.

Once the authors have established a time series estimation of their estimate of the true value of gold they compare this to the market price in each quarter and test whether the difference is statistically significant. As the difference is found to be insignificant the authors find that no bubble exists in the gold price for the period under examination. They do however say that short periods of bubbles may be present during important historical events such as Black Monday, the gulf wars and the silver crisis.

Method: Dynamic factor analysis

Data: Quarterly data from q1 1975 to Q4 1998. PM Fixing gold price, US PPI, 1 month t-bill rate.

Full Citation: Bertus, M., & Stanhouse, B. (2001). RATIONAL SPECULATIVE BUBBLES IN THE G O L D FUTURES M A R K E T : A N APPLICATION OE DYNAMIC FACTOR ANALYSIS. The Journal of futures markets, 21(1), 97–108.

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From → Empirical, Gold

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