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A Gold Bubble?

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Abstract

In this paper we use a test developed by Phillips et al. (2011) to identify a bubble in the gold market. We find that the price of gold followed an explosive price process between 2002 and 2012 interrupted only briefly by the subprime crisis in 2008. We also provide a theoretical foundation for such bubble tests based on a behavioural model of heterogeneous agents and demonstrate that periods of explosive price behaviour are consistent with increased chartist activity in the gold market. The identification strategy yields economically intuitive results and is a simple alternative to using more complex estimation techniques commonly used in the heterogeneous agents literature.

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File URL: http://www.finance.uts.edu.au/research/wpapers/wp175.pdf
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Bibliographic Info

Paper provided by Finance Discipline Group, UTS Business School, University of Technology, Sydney in its series Working Paper Series with number 175.

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Length: 29 pages
Date of creation: 01 Oct 2012
Date of revision:
Handle: RePEc:uts:wpaper:175

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Related research

Keywords: bubble; gold; investor behaviour; explosive process; heterogeneous agents; chartists;

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References

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  1. Pindyck, Robert S, 1993. "The Present Value Model of Rational Commodity Pricing," Economic Journal, Royal Economic Society, vol. 103(418), pages 511-30, May.
  2. Ke Tang & Wei Xiong, 2010. "Index Investment and Financialization of Commodities," NBER Working Papers 16385, National Bureau of Economic Research, Inc.
  3. J. Doyne Farmer & Shareen Joshi, 2000. "The price dynamics of common trading strategies," Papers cond-mat/0012419, arXiv.org.
  4. Day, R. & Huang, W., 1988. "Bulls, Bears And Market Sheep," Papers m8822, Southern California - Department of Economics.
  5. Dirk G. Baur & Thomas K. McDermott, . "Is gold a safe haven? International evidence," The Institute for International Integration Studies Discussion Paper Series iiisdp310, IIIS.
  6. Simon van Norden, 1995. "Regime Switching as a Test for Exchange Rate Bubbles," Econometrics 9502001, EconWPA, revised 09 Aug 1995.
  7. Xue-Zhong He & Frank H. Westerhoff, 2004. "Commodity Markets, Price Limiters and Speculative Price Dynamics," Research Paper Series 136, Quantitative Finance Research Centre, University of Technology, Sydney.
  8. Diba, Behzad T & Grossman, Herschel I, 1988. "Explosive Rational Bubbles in Stock Prices?," American Economic Review, American Economic Association, vol. 78(3), pages 520-30, June.
  9. Dirk G Baur & Kristoffer Glover, 2012. "The Destruction of a Safe Haven Asset?," Working Paper Series 174, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  10. Refet S. G├╝rkaynak, 2005. "Econometric tests of asset price bubbles: taking stock," Finance and Economics Discussion Series 2005-04, Board of Governors of the Federal Reserve System (U.S.).
  11. Dirk G. Baur & Brian M. Lucey, 2007. "Is Gold a Hedge or a Safe Haven? An Analysis of Stocks, Bonds and Gold," The Institute for International Integration Studies Discussion Paper Series iiisdp198, IIIS.
  12. Hommes, C.H. & Wagener, F.O.O., 2008. "Complex evolutionary systems in behavioral finance," CeNDEF Working Papers 08-05, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  13. Vipin Arora & Shuping Shi, 2013. "A Heterogenous Agent Foundation for Tests of Asset Price Bubbles," CAMA Working Papers 2013-35, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  14. Carl Chiarella & Roberto Dieci & Xue-Zhong He, 2008. "Heterogeneity, Market Mechanisms, and Asset Price Dynamics," Research Paper Series 231, Quantitative Finance Research Centre, University of Technology, Sydney.
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Cited by:
  1. Brian Lucey & Fergal A. O'connor, 2012. "Do Bubbles occur in Gold Prices? Evidence from Gold Lease Rates and Markov Switching Models," The Institute for International Integration Studies Discussion Paper Series iiisdp418, IIIS.

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