Shock Waves and Golden Shores: The Asymmetric Interaction between Gold Prices and the Stock Market

23 Pages Posted: 17 Aug 2019

See all articles by Alice Buccioli

Alice Buccioli

Nordea Bank | Model Validation

Thomas Kokholm

School of Business and Social Sciences, Aarhus University

Date Written: January 30, 2019

Abstract

Gold is often considered a safe haven asset providing negative return correlation with the stock market in times of distress, while in more calm periods the correlation between the two is close to zero. We study the dynamic inter-linkage of gold prices and the stock market. Specifically, we model the log-prices of gold and a stock index as jump-diffusive processes, with the jumps arriving with mutually exciting intensities. Hence, the occurrence of a negative shock to the stock index spills over into a higher probability of positive shocks to the gold price and vice versa. To perform the empirical analysis, we consider daily data on gold prices and daily closing prices on the SPX index. Utilizing the knowledge that the moment conditions of the model are computed efficiently in closed form, we use the generalized method of moments to estimate the parameters of the model. We document the existence of cross-excitation between the stock index and gold prices, with the channel from the stock index to gold prices being the most pronounced. Finally, we study the power of the proposed jump model to predict future price jumps and find good performance.

Keywords: Hawkes process, Gold modeling, Safe haven asset, GMM; Jumps

JEL Classification: C58, G10, G17

Suggested Citation

Buccioli, Alice and Kokholm, Thomas, Shock Waves and Golden Shores: The Asymmetric Interaction between Gold Prices and the Stock Market (January 30, 2019). Available at SSRN: https://ssrn.com/abstract=3437640 or http://dx.doi.org/10.2139/ssrn.3437640

Alice Buccioli

Nordea Bank | Model Validation ( email )

Copenhagen
Denmark

Thomas Kokholm (Contact Author)

School of Business and Social Sciences, Aarhus University ( email )

Fuglesangs Allé 4
Aarhus, DK-8210
Denmark

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