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Half Century of Gold Price: Regime-Switching and Forecasting Framework

Nguyen Bao Anh and Yiqiang Q. Zhao

International Journal of Financial Research, 2021, vol. 12, issue 3, 1-18

Abstract: This paper studies the history of gold price in the international context using Markov-switching models. The literature surrounding the Markov-switching model is reviewed from the earliest iterations of Hamilton to recent developments. We show applicability of Markov stochastic process in forecasting commodity prices; in particular, the gold spot price. The research imposes the features of Markov regime-switching models, considering gold as a financial asset to offer a comprehensive methodology for forecasting commodity price. The paper discovers that applying Markov regime-switching could significantly improve the forecast abilities in commodity prices. Analysis of the model outcome indicates that the abnormal increases of gold price in history always resulted from special economic conditions. This study makes a novel contribution to the field by demonstrating that the impact of CPI change to gold price is subject to the regimes, which is more sophisticated than what has been commonly accepted in economics literature to date.

Keywords: Markov-switching model; gold price; MS auto-regression; regime-switching (search for similar items in EconPapers)
Date: 2021
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DOI: 10.5430/ijfr.v12n3p1

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