Gold, Platinum, and Expected Stock Returns

69 Pages Posted: 12 Aug 2016 Last revised: 17 Apr 2018

Darien Huang

Cornell University - Department of Finance

Mete Kilic

University of Southern California - Marshall School of Business

Date Written: April 2, 2018

Abstract

The ratio of gold to platinum prices (GP) reveals persistent variation in risk and proxies for an important economic state variable. GP predicts future stock returns in the time-series, explains stock return variation in the cross-section, and is significantly correlated with option-implied tail risk measures. Contrary to conventional wisdom, gold prices fall in recessions, albeit by less than platinum prices. A model featuring recursive preferences, time-varying tail risk, and preference shocks for gold and platinum can account for asset pricing dynamics of equity, gold, and platinum markets, rationalize the return predictability, and explain why gold prices fall in bad times.

Keywords: gold, platinum, return predictability, tail risk, disaster risk

JEL Classification: G10, G11, G12, G17

Suggested Citation

Huang, Darien and Kilic, Mete, Gold, Platinum, and Expected Stock Returns (April 2, 2018). Available at SSRN: https://ssrn.com/abstract=2820252 or http://dx.doi.org/10.2139/ssrn.2820252

Darien Huang

Cornell University - Department of Finance ( email )

Ithaca, NY 14853-4201
United States

Mete Kilic (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

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