Gold, platinum, and expected stock returns

Darien Huang and Mete Kilic

Journal of Financial Economics, 2019, vol. 132, issue 3, 50-75

Abstract: The ratio of gold to platinum prices (GP) reveals persistent variation in risk and proxies for an important economic state variable. GP predicts future stock returns in the time series, explains stock return variation in the cross-section, and is significantly correlated with option-implied tail risk measures. Contrary to conventional wisdom, gold prices fall in recessions, albeit by less than platinum prices. A model featuring recursive preferences, time-varying tail risk, and preference shocks for gold and platinum can account for asset pricing dynamics of equity, gold, and platinum markets, rationalize the return predictability, and explain why gold prices fall in bad times.

Keywords: Tail risk; Stock return predictability; Commodity markets; Precious metals; Preferences (search for similar items in EconPapers)
JEL-codes: C58 E20 G12 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (60)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:132:y:2019:i:3:p:50-75

DOI: 10.1016/j.jfineco.2018.11.004

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