The Determinants of Stock Price Exposure: Financial Engineering and the Gold Mining Industry

Abstract:     
This paper studies the exposure of North American gold mining firms to changes in the price of gold. While the average mining stock moves 2 percent for each 1 percent change in gold prices, exposures vary considerably over time and across firms. As predicted by valuation models, gold firm exposures are significantly negatively related to the firmis hedging and diversification activities, and to gold prices and gold return volatility, and are positively related to firm leverage. Simple discounted cash flow models produce useful beta predictions, but they systematically overestimate exposures possibly due to their failure to reflect managerial flexibility.

JEL Classification: G12

Accepted Paper Series