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

Author

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  • Mehmet Balcilar

    (Department of Economics, Eastern Mediterranean University)

  • Zeynel Abidin Ozdemir

    (Gazi University, Ankara, Turkey)

Abstract

We use the time-varying parameter stochastic volatility (TVP-SV) model and monthly data from 1962 to 2017 to examine the effect of uncertainty in the precious metal markets (gold, silver, platinum, and palladium). We find evidence that uncertainty has a largely time-varying impact on the precious metal prices. The results also show significant variation in the level of volatility, with high volatility being associated with periods of large volatility shocks corresponding to known historical events. The results show that uncertainty has a significant negative impact on the precious metal prices and the impact is more negative during higher volatility periods, implying that large volatility increases cause crashes in the precious metals markets. 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 price level has a positive and significant effect on the volatility and, thus, higher precious metal prices generates increased future uncertainty.

Suggested Citation

  • Mehmet Balcilar & Zeynel Abidin Ozdemir, 2018. "The volatility effect on precious metals prices in a stochastic volatility in mean model with time-varying parameters," Working Papers 15-34, Eastern Mediterranean University, Department of Economics.
    • Handle: RePEc:emu:wpaper:15-34.pdf
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    More about this item

    Keywords

    Precious metals; Uncertainty; Stochastic volatility; State–space.;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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