The volatility effect on precious metals price returns in a stochastic volatility in mean model with time-varying parameters

Balcilar M., ÖZDEMİR Z. A.

PHYSICA A-STATISTICAL MECHANICS AND ITS APPLICATIONS, vol.534, 2019 (SCI-Expanded) identifier identifier

  • Publication Type: Article / Article
  • Volume: 534
  • Publication Date: 2019
  • Doi Number: 10.1016/j.physa.2019.122329
  • Journal Name: PHYSICA A-STATISTICAL MECHANICS AND ITS APPLICATIONS
  • Journal Indexes: Science Citation Index Expanded (SCI-EXPANDED), Scopus
  • Keywords: Precious metals, Uncertainty, Stochastic volatility, State-space model, FINANCIAL ECONOMICS, EXCHANGE-RATES, STOCK MARKETS, SAFE HAVEN, COMMODITY, GOLD, OIL, BEHAVIOR, VARIANCE, DYNAMICS
  • Ankara Haci Bayram Veli University Affiliated: No

Abstract

The purpose of this study is to examine how volatility effects precious metals price returns. We use the time-varying parameter stochastic volatility in mean (TVP-SVM) model to estimate the volatility and incorporate strong time varying dynamics in commodity markets. The study employs monthly data on gold, silver, copper, platinum, and palladium from 1962 to 2017. We find evidence that volatility has a largely time-varying impact on the precious metal price returns. The results show that volatility has a significant negative impact on the precious metal price returns and the impact is more negative during higher volatility periods. The market volatility is also found to be extremely persistent, implying that strong policy measures might be required to restore equilibrium. The estimates also show that metal price returns have a positive and significant effect on the volatility and, thus, higher precious metal price returns generate increased future volatility. (C) 2019 Elsevier B.V. All rights reserved.