Forecasting Stock-Market Tail Risk and Connectedness in Advanced Economies Over a Century: The Role of Gold-to-Silver and Gold-to-Platinum Price Ratios

We examine the predictive value of risk perceptions as measured in terms of the gold-to-silver and gold-to-platinum price ratios for stock-market tail risks and their connectedness in eight major industrialized economies using monthly data for the period 1916:02-2020:10 and 1968:01-2020:10, where we use four variants of the popular Conditional Autoregressive Value at Risk (CAViaR) framework to estimate the tail risks for both 1% and 5% VaRs. Our findings for the short sample period show that the gold-to-silver price ratio resembles the gold-to-platinum price ratios in that it is a useful proxy for global risk. Our findings for the long sample period show, despite some heterogeneity across economies, that the gold-to-silver price ratio often helps to out-of-sample forecast for both 1% and 5% stock market tail risks, particularly when a forecaster suffers a higher loss from underestimation of tail risks than from a corresponding overestimation of the same absolute size. We also find that using the gold-to-silver price ratio for forecasting the total connectedness of stock markets is beneficial for an investor who suffers a higher loss from an underestimation of total connectedness (i.e., an investor who otherwise would overestimate the benefits from portfolio diversification) than from a comparable overestimation.