How to Mine Gold Without Digging

International Journal of Financial Engineering, Vol. 6, No. 1, p.1950009, 2019

23 Pages Posted: 15 May 2018 Last revised: 12 Nov 2019

See all articles by Kevin Guo

Kevin Guo

Columbia University

Tim Leung

University of Washington - Department of Applied Math

Brian Ward

Columbia University

Date Written: May 2, 2018

Abstract

This paper examines the main drivers of the returns of gold miner stocks and ETFs during 2006-2017. We solve a combined optimal control and stopping problem to demonstrate that gold miner equities behave like real options on gold. Inspired by our proposed model, we construct a method to dynamically replicate gold miner stocks using two factors: the spot gold ETF and market equity portfolio. Furthermore, through each firm's factor loadings on the replicating portfolio, we dynamically infer the firm's implied leverage parameters of our model using the Kalman Filter. We find that our approach can explain a significant portion of the drivers of firm implied gold leverage. We posit that gold miner companies hold additional real options which help mitigate firm downside volatility, but these real options contribute to lower returns relative to the replicating portfolio when gold returns are positive.

Suggested Citation

Guo, Kevin and Leung, Tim and Ward, Brian, How to Mine Gold Without Digging (May 2, 2018). International Journal of Financial Engineering, Vol. 6, No. 1, p.1950009, 2019, Available at SSRN: https://ssrn.com/abstract=3172514 or http://dx.doi.org/10.2139/ssrn.3172514

Kevin Guo

Columbia University ( email )

6 Dorchester Lane
Newtown, PA 18940
United States

HOME PAGE: http://www.columbia.edu/~klg2138

Tim Leung (Contact Author)

University of Washington - Department of Applied Math ( email )

Lewis Hall 217
Department of Applied Math
Seattle, WA 98195
United States

HOME PAGE: http://faculty.washington.edu/timleung/

Brian Ward

Columbia University ( email )

New York, NY
United States

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