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The Effect of Investor Sentiment on Gold Market Dynamics

Author

Listed:
  • Mehmet Balcilar

    () (Department of Economics, Eastern Mediterranean University, Turkey; Department of Economics, University of Pretoria, South Africa ; IPAG Business School, France)

  • Matteo Bonato

    () (Department of Economics and Econometrics, University of Johannesburg, Auckland Park, South Africa)

  • Riza Demirer

    () (Department of Economics & Finance, Southern Illinois University Edwardsville, USA.)

  • Rangan Gupta

    () (Department of Economics, University of Pretoria)

Abstract

This paper explores the effect of investor sentiment on the intraday dynamics in the gold market. Using a novel methodology to detect nonlinear causalities, we examine the effect of fear and excitement in the stock market on gold return and intraday volatility at alternative quantiles. While no significant sentiment effect is observed on daily gold returns, we find that sentiment drives intraday volatility in the gold market. Interestingly however, the sentiment effect is channeled via the discontinuous component of intraday volatility and more significantly at extreme quantiles, suggesting that extreme fear (excitement) contributes to positive (negative) volatility jumps in gold returns. The results suggest that measures of sentiment could be utilized to model volatility jumps in safe haven assets that are often hard to predict and have significant implications for risk management as well as the pricing of options.

Suggested Citation

  • Mehmet Balcilar & Matteo Bonato & Riza Demirer & Rangan Gupta, 2016. "The Effect of Investor Sentiment on Gold Market Dynamics," Working Papers 201638, University of Pretoria, Department of Economics.
  • Handle: RePEc:pre:wpaper:201638
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Investor Sentiment; Gold Returns; Intraday Volatility;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market

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