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The impact of festivities on gold price expectation and volatility

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  • Schmidbauer, Harald
  • Rösch, Angi

Abstract

A majority of gold worldwide is bought as jewelry. China and India together account for about 60% of worldwide gold jewelry consumption. Gold is a traditional gift in many cultures and often given away on the occasion of festivals, such as Chinese New Year, Diwali, and Ramadan Eid. These facts lead us to an obvious question: Do gold prices behave differently around festivals? This question has not yet been systematically discussed on the basis of stochastic models. The purpose of the present paper is to investigate the effects of a selection of festivals on the distribution of daily gold price changes. Dummy variables indicating the festival are modified to reflect anticipation and/or aftereffects of festivities, and they are used as covariates in a combination of regression and GARCH models to specify conditional expectation and volatility of daily gold price changes. We set up a model which measures the effect of festivities on the return distribution in terms of the magnitude of current volatility, which acts as a “news magnifier”. After fitting this model to data, extensive robustness checks are undertaken to make sure our results are valid.

Suggested Citation

  • Schmidbauer, Harald & Rösch, Angi, 2018. "The impact of festivities on gold price expectation and volatility," International Review of Financial Analysis, Elsevier, vol. 58(C), pages 117-131.
    • Handle: RePEc:eee:finana:v:58:y:2018:i:c:p:117-131
    DOI: 10.1016/j.irfa.2018.03.006
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    More about this item

    Keywords

    Gold prices; Festivals; Gold jewelry; Gold price volatility; GARCH with covariates; News-magnifying model;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • L70 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - General
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market

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