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Forecasting the Price of Gold Using Dynamic Model Averaging

  • Goodness C. Aye


    (Department of Economics, University of Pretoria)

  • Rangan Gupta


    (Department of Economics, University of Pretoria)

  • Shawkat Hammoudeh


    (Lebow College of Business, Drexel University, Philadelphia, USA)

  • Won Joong Kim


    (Department of Economics, Konkuk University, Seoul, Korea)

We develop models for examining possible predictors of the return on gold that embrace six global factors (business cycle, nominal, interest rate, commodity, exchange rate and stock price factors) and two uncertainty indices (the Kansas City Fed’s financial stress index and the U.S. Economic uncertainty index). Specifically, by comparing with other alternative models, we show that the dynamic model averaging (DMA) and dynamic model selection (DMS) models outperform not only a linear model (such as random walk) but also the Bayesian model averaging (BMA) model for examining possible predictors of the return of gold. The DMS is the best overall across all forecast horizons. Generally, all the predictors show strong predictive power at one time or another though at varying magnitudes, while the exchange rate factor and the Kansas City Fed’s financial stress index appear to be strong at almost all horizons and sub-periods. However, the forecasting prowess of the exchange rate is supreme.

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Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201415.

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Length: 31 pages
Date of creation: Apr 2014
Date of revision:
Handle: RePEc:pre:wpaper:201415
Contact details of provider: Postal: PRETORIA, 0002
Phone: (+2712) 420 2413
Fax: (+2712) 362-5207
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  1. Gary Koop & Dimitris Korobilis, 2011. "UK Macroeconomic Forecasting with Many Predictors: Which Models Forecast Best and When Do They Do So?," Working Papers 1118, University of Strathclyde Business School, Department of Economics.
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  17. Ikram Jebabli & Mohamed Arouri & Frédéric Teulon, 2014. "On the effects of world stock market and oil price shocks on food prices: An empirical investigation based on TVPVAR models with stochastic volatility," Working Papers 2014-209, Department of Research, Ipag Business School.
  18. Walid Chkili & Shawkat Hammoudeh & Duc Khuong Nguyen, 2013. "Long memory and asymmetry in the volatility of commodity markets and Basel Accord: choosing between models," Working Papers 2013-009, Department of Research, Ipag Business School.
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  23. Rangan Gupta & Shawkat Hammoudeh & Won Joong Kim & Beatrice D. Simo-Kengne, 2013. "Forecasting China’s Foreign Exchange Reserves Using Dynamic Model Averaging: The Role of Macroeconomic Fundamentals, Financial Stress and Economic Uncertainty," Working Papers 201338, University of Pretoria, Department of Economics.
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