Gold and Geopolitical Risk!
The papers of a Study of Excess ‘Volatility of Gold and Silver’ By Parthajit Kayal, S. Maheswaran discusses the case of strong path dependency in asset prices from the theoretical and empirical standpoints. Specifically, it demonstrates 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 says Kayal & Maheswaran.
The paper presented at India Gold Policy Centre, IIMA Conference on Gold & Gold Markets. The conference also presented the papers about ‘Gold and Geopolitical Risk’ by Dirk G. Baur, Lee Smales. There is a growing empirical literature on safe haven assets but there are not many studies about the origin of the safe haven status.
This paper extends the common focus on extreme stock market movements and financial turmoil with an analysis of geopolitical risk and two sub-groups geopolitical threats and realized geopolitical acts. “We find that gold shows a unique behavior among all precious metals with a reaction to geopolitical risks in general and geopolitical threats in particular” says Baur & Smales.
There is no additional increase in gold return volatility due to geopolitical risks and geopolitical risk is not captured by the stock market volatility index VIX. This study provides new evidence on the unique status of gold as a safe haven asset.
