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Optimal portfolio choice of gold assets in the differential market and differential game structures

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  • Jin-Ray Lu
  • Chih-Ming Chan

Abstract

Portfolio choices of gold-related assets for market investors and dealers may not only depend on price differences and the inflation rate, but may also react to the market participants’ strategic behavior and risk attitude. This study develops a two-agent stochastic differential game model to solve the portfolio choice problem of the asset allocations of gold spot, futures, and cash for market participators who are exposed to inflation risks. The equilibrium prices of spot and futures driven by the volatility rate and co-variances that reflect various risk sources are also determined. Specifically, regarding the choice of hedging tools, market participators may prefer gold spot to futures for the purpose of hedging inflation risk. By capturing the stylistic facts of differential market and multiple agent structures, the article can develop a more reasonable and practical model to usefully explain the gold portfolio choices and pricing in the gold markets. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Jin-Ray Lu & Chih-Ming Chan, 2014. "Optimal portfolio choice of gold assets in the differential market and differential game structures," Review of Quantitative Finance and Accounting, Springer, vol. 42(2), pages 309-325, February.
    • Handle: RePEc:kap:rqfnac:v:42:y:2014:i:2:p:309-325
    DOI: 10.1007/s11156-013-0343-2
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    Cited by:

    1. Osman Gulseven, 2020. "Turn-of-the Year Affect in Gold Prices: Decomposition Analysis," Papers 2003.11027, arXiv.org.
    2. Thomas Conlon & Brian M. Lucey & Gazi Salah Uddin, 2018. "Is gold a hedge against inflation? A wavelet time-scale perspective," Review of Quantitative Finance and Accounting, Springer, vol. 51(2), pages 317-345, August.

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    More about this item

    Keywords

    Portfolio choice; Gold futures; Differential market; Differential game; G11; G12;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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