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What drives gold returns? A decision tree analysis

Author

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  • Malliaris, A.G.
  • Malliaris, Mary

Abstract

The behavior of gold as an investment asset has been researched extensively. For the very long run, that is several decades, gold does not outperform equities. However, for shorter periods, gold responds to fears of inflation, stock market corrections, currency crises and financial instabilities very vigorously. In this paper we follow a decision tree methodology to investigate the behavior of gold prices using both traditional financial variables such as equity returns, equity volatility, oil prices, and the euro. We also use the new Cleveland Financial Stress Index to investigate its effectiveness in explaining changes in gold prices. We find that gold returns depend on different determinants across various regimes.

Suggested Citation

  • Malliaris, A.G. & Malliaris, Mary, 2015. "What drives gold returns? A decision tree analysis," Finance Research Letters, Elsevier, vol. 13(C), pages 45-53.
    • Handle: RePEc:eee:finlet:v:13:y:2015:i:c:p:45-53
    DOI: 10.1016/j.frl.2015.03.004
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    References listed on IDEAS

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    1. A. Malliaris & Mary Malliaris, 2013. "Are oil, gold and the euro inter-related? Time series and neural network analysis," Review of Quantitative Finance and Accounting, Springer, vol. 40(1), pages 1-14, January.
    2. Robert J. Barro & Sanjay Misra, 2016. "Gold Returns," Economic Journal, Royal Economic Society, vol. 126(594), pages 1293-1317, August.
    3. Pierdzioch, Christian & Risse, Marian & Rohloff, Sebastian, 2014. "The international business cycle and gold-price fluctuations," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(2), pages 292-305.
    4. Mensi, Walid & Beljid, Makram & Boubaker, Adel & Managi, Shunsuke, 2013. "Correlations and volatility spillovers across commodity and stock markets: Linking energies, food, and gold," Economic Modelling, Elsevier, vol. 32(C), pages 15-22.
    5. Ciner, Cetin & Gurdgiev, Constantin & Lucey, Brian M., 2013. "Hedges and safe havens: An examination of stocks, bonds, gold, oil and exchange rates," International Review of Financial Analysis, Elsevier, vol. 29(C), pages 202-211.
    6. Claude B. Erb & Campbell R. Harvey, 2013. "The Golden Dilemma," Financial Analysts Journal, Taylor & Francis Journals, vol. 69(4), pages 10-42, July.
    7. repec:bla:jfinan:v:43:y:1988:i:5:p:1075-93 is not listed on IDEAS
    8. Raj Aggarwal & Brian Lucey & Fergal O'Connor, 2015. "World Metal Markets," World Scientific Book Chapters, in: Anastasios G Malliaris & William T Ziemba (ed.), THE WORLD SCIENTIFIC HANDBOOK OF FUTURES MARKETS, chapter 10, pages 325-347, World Scientific Publishing Co. Pte. Ltd..
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    Keywords

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    JEL classification:

    • C88 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Other Computer Software
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G1 - Financial Economics - - General Financial Markets

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