The influence of investor sentiment on the monetary policy announcement liquidity response in precious metal markets

Lee Smales and Brian Lucey

Journal of International Financial Markets, Institutions and Money, 2019, vol. 60, issue C, 19-38

Abstract: In addition to a myriad of industrial uses, precious metals play an important role in the global financial system; they are increasingly popular as an investment and form part of a well-diversified portfolio in addition to acting as central bank reserves. Understanding how macroeconomic events shape liquidity in this market is important for a number of market participants, and also helps policy makers assess the efficacy of the policy transmission mechanism. Using high-frequency data, we consider liquidity provision in the period around monetary policy announcements and relate this to prevailing levels of investor sentiment. We are able to contrast changes in liquidity in the gold and silver markets, and across three instruments (futures, ETFs, and physical/bullion). We show that liquidity is removed from the market around 5-minutes prior to the announcement and reverts to normal within 10-minutes (gold market) and 20-minutes (silver market). The magnitude of the liquidity response is determined by both the prevailing level of investor sentiment and the size of the monetary policy surprise – with the greatest liquidity response (in both speed and magnitude) occurring in the least liquid instruments/markets. Both sentiment and monetary policy surprises have a greater impact on liquidity during periods of low sentiment, consistent with greatest demand for assets possessing ‘safe-haven’ qualities occurring during such periods.

Keywords: Monetary policy decisions; Liquidity; Investor sentiment; Gold; Silver (search for similar items in EconPapers)
JEL-codes: G1 G10 G14 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:60:y:2019:i:c:p:19-38

DOI: 10.1016/j.intfin.2018.12.003

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