A Study of Excess Volatility of Gold and Silver

38 Pages Posted: 20 Aug 2016 Last revised: 28 Aug 2018

See all articles by Parthajit Kayal

Parthajit Kayal

Madras School of Economics

Srinivasan Maheswaran

Institute for Financial Management and Research (IFMR)

Date Written: August 8, 2018

Abstract

This paper discusses the case of strong path dependency in asset prices from the theoretical and empirical standpoints. Specifically, it demonstrates the persistence of excess volatility in the gold spot price data that engenders excessive path dependence, whereas it is not the same with silver. For this study, we use the extreme value estimator proposed by Rogers and Satchell (1991) and the VRatio proposed by Maheswaran et al (2011). The data for the study is for the period from January 2001 to December 2016. We use multiple-days‘ time horizons for examining the excess volatility with a better approximation of Brownian motion in the data. We capture the excess volatility in the gold data using the Binomial Markov Random Walk model. In this paper, we also utilize the Expected Lifetime Shortfall (ELS) ratio, as a measure of risk to test for the presence of mean reversion in asset prices. Using this ratio, one can observe that the strong mean-reverting characteristic in gold makes it a better investment choice than silver, in general, in the medium term.

Keywords: Volatility, Commodity Market, precious metals, random walk, Brownian motion, simulation, extreme value estimator, and market efficiency

JEL Classification: G11, G12, G14, G15, G17, F37, Q02

Suggested Citation

Kayal, Parthajit and Maheswaran, Srinivasan, A Study of Excess Volatility of Gold and Silver (August 8, 2018). Available at SSRN: https://ssrn.com/abstract=2826502 or http://dx.doi.org/10.2139/ssrn.2826502

Parthajit Kayal (Contact Author)

Madras School of Economics ( email )

Gandhi Mandapam Road,
Behind Government Data Center
Chennai, Tamilnadu 600025
India
+919962371740 (Phone)

Srinivasan Maheswaran

Institute for Financial Management and Research (IFMR) ( email )

24 Kothari Road
Nungambakkam
Chennai, Tamilnadu 600034
India

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