Asymmetric Volatility in the Gold Market

Abstract

The volatility of equity returns generally exhibits an asymmetric reaction to positive and negative shocks. Economic explanations for this phenomenon are leverage and a volatility feedback effect. This paper studies the volatility of gold and demonstrates that there is an inverted asymmetric reaction to positive and negative shocks, i.e. positive shocks increase the volatility by more than negative shocks. The paper argues that this effect is related to the safe haven property of gold. Investors interpret positive gold price changes as a signal for future adverse conditions and uncertainty in other asset markets. This introduces uncertainty in the gold market and thus higher volatility. The empirical results hold for gold bullion and gold coins denominated in different currencies, for different return frequencies, sample periods and distributional assumptions. Finally, we show that the inverted volatility effect of gold can lower the aggregate risk of a portfolio for specific correlation levels.

Keywords: gold, commodities, volatility asymmetry, leverage effect, volatility feedback effect, uncertainty

JEL Classification: C32, G10, G11, G15, L70