Price discovery, market efficiency and temporal dynamic price relationship: an empirical analysis of worldwide precious metals markets

Song, Duan Duan

February 2012

Thesis or dissertation

© 2012 Duan Duan Song. All rights reserved. No part of this publication may be reproduced without the written permission of the copyright holder.

The aim of this research is to investigate the price discovery, market efficiency and the temporal dynamic price relationships between financial prices (futures and index) and spot price, for three of the most important precious metals, namely gold, silver and platinum.

When people are concerned about the economy, prudent investors switch their investment into precious metals rather than other asset classes. Precious metals futures, thus, are used by commercial producers and users and investors of precious metals to hedge risk or to make profit on the price fluctuations. Understanding the relationship between markets should foster sensible investment decisions and improve the statistical hedging properties of precious metals.

Inspired by consideration of the unique status of precious metals in the economy and limited existing empirical evidence of price relationship regarding these metals, this research attempts to contribute to the space literature on market efficiency and causality cross three categories of markets—index, futures and spot. Further it will extend the research on price relationships and interactional impacts of precious metals markets based on non-synchronous trading that connects all the major markets around the world.

The findings confirm long-term equilibrium relationships between US futures/index markets and special spot markets of all three precious metals by Cointegration tests. Via VECMs, the findings also revealed that futures prices and indexes of all the tested precious metals played a dominant role in the long run, but not all of them could be the unbiased estimators of the future spot price. On the other hand, mixed results of short-term causality suggested that US futures and indices led spot prices in the majority of cases.

The results from this research supported the hypothesis that futures/indices functioned in the price discovery role in both the long- and short-term, and more importantly, the findings had value implications for market users in decision-making and improving their portfolio performance on precious metal markets.

Business School, The University of Hull
Rhodes, Mark J.; Ozkan, Aydin (Professor of finance)
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