Stock Market Bubbles and the Forecastability of Goldreturns (and Volatility)

33 Pages Posted: 19 Jun 2023

See all articles by David Gabauer

David Gabauer

affiliation not provided to SSRN

Rangan Gupta

University of Pretoria

Sayar Karmakar

University of Florida

Joshua Nielsen

affiliation not provided to SSRN

Abstract

Firstly, we use the Multi-Scale LPPLS Confidence Indicator approach to detectboth positive and negative bubbles at short-, medium- and long-term horizons forthe stock markets of the G7 and the BRICS countries. We were able to detect majorcrashes and rallies in the 12 stock markets over the period of the 1st week of January,1973 to the 2nd week of September, 2020. We also observed similar timing of strong(positive and negative) LPPLS indicator values across both G7 and BRICS countries,suggesting interconnectedness of the extreme movements in these stock markets.Secondly, we utilize these indicators to forecast gold returns and its volatility, usinga method involving block means of residuals obtained from the popular LASSOroutine, given that the number of covariates ranged between 42 to 72, and goldreturns demonstrated a heavy upper tail.We found that, our bubbles indicators,particularly when both positive and negative bubbles are considered simultaneously,can accurately forecast gold returns at short- to medium-term, and also time-varyingestimates of gold returns volatility to a lesser extent.Our results have importantimplications for the portfolio decisions of investors who seek a safe haven duringboom-bust cycles of major global stock markets.

Keywords: Gold, stock markets, Bubbles, forecasting, Returns, Volatility

Suggested Citation

Gabauer, David and Gupta, Rangan and Karmakar, Sayar and Nielsen, Joshua, Stock Market Bubbles and the Forecastability of Goldreturns (and Volatility). Available at SSRN: https://ssrn.com/abstract=4484213 or http://dx.doi.org/10.2139/ssrn.4484213

David Gabauer

affiliation not provided to SSRN ( email )

No Address Available

Rangan Gupta

University of Pretoria ( email )

Physical Address Economic and Management Sciences
Pretoria, 0002
South Africa

Sayar Karmakar (Contact Author)

University of Florida ( email )

PO Box 117165, 201 Stuzin Hall
Gainesville, FL 32610-0496
United States

Joshua Nielsen

affiliation not provided to SSRN ( email )

No Address Available

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