Rationality in Precious Metals Forward Markets: Evidence of Behavioural Deviations in the Gold Markets

29 Pages Posted: 17 May 2014 Last revised: 9 Nov 2014

See all articles by Raj Aggarwal

Raj Aggarwal

University of Akron; Federal Reserve Banks - Federal Reserve Bank of Cleveland; Kent State University; Kent State University Foundation

Brian M. Lucey

Trinity Business School, Trinity College Dublin; University of Sydney Business School; Ho Chi Minh City University of Economics and Finance; Jiangxi University of Finance and Economics

Fergal A. O'Connor

University College Cork; University of York - The York Management School; University of Dublin - Business School and Institute for International Integration Studies

Date Written: May 15, 2014

Abstract

We offer the first examination of whether the gold forward rate is an unbiased predictor of the future gold spot rate. We find strong evidence that it is not, particularly at longer maturities. Building on Aggarwal and Zong’s (2008) approach to allow for investor risk aversion, we then examine if these deviations from rationality can be explained by behavioural factors such as market optimism and over-reaction to news. We find that forecast errors in the gold market generally suffer from overreaction to observed spot price changes but underreact to outflows of gold from Exchange Traded Funds. Further, the forward premium is found to be a consistently optimistic estimate over the full sample. Finally, while the market mood is shown to vary greatly over time, swinging from pessimism in the 1990’s to optimism after 2000, the forecast revision overreaction is found to be consistently stable over the full sample. These are significant, important, and consistent indications of seemingly non-rational behavioural effects in the gold forward market.

Keywords: gold, gold forward rate, behavioural, forecast errors, forecast revisions, pessimism, overreaction, Exchange Traded Funds

JEL Classification: C22, G14, G15, Q30

Suggested Citation

Aggarwal, Raj and Lucey, Brian M. and O'Connor, Fergal A., Rationality in Precious Metals Forward Markets: Evidence of Behavioural Deviations in the Gold Markets (May 15, 2014). Journal of Multinational Financial Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2437444

Raj Aggarwal

University of Akron ( email )

Akron, OH 44325-4803
United States

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Kent State University ( email )

College of Business Administration
Kent, OH 44242-0001
United States

Kent State University Foundation ( email )

Akron, OH 44325-4803
United States

Brian M. Lucey

Trinity Business School, Trinity College Dublin ( email )

The Sutherland Centre, Level 6, Arts Building
Dublin 2
Ireland
+353 1 608 1552 (Phone)
+353 1 679 9503 (Fax)

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Ho Chi Minh City University of Economics and Finance ( email )

59C Nguyen Dình Chieu
6th Ward, District 3
Ho Chi Minh City, Ho Chi Minh 70000
Vietnam

Jiangxi University of Finance and Economics ( email )

South Lushan Road
Nanchang, Jiangxi 330013
China

Fergal A. O'Connor (Contact Author)

University College Cork ( email )

College Road
Cork
Ireland

University of York - The York Management School ( email )

Sally Baldwin Buildings
Heslington
York, North Yorkshire YO10 5DD
United Kingdom

University of Dublin - Business School and Institute for International Integration Studies ( email )

2-3 College Green
Dublin, Leinster D2
Ireland

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