Optimal portfolio choice of gold assets in the differential market and differential game structures

Jin-Ray Lu () and Chih-Ming Chan

Review of Quantitative Finance and Accounting, 2014, vol. 42, issue 2, 309-325

Abstract: Portfolio choices of gold-related assets for market investors and dealers may not only depend on price differences and the inflation rate, but may also react to the market participants’ strategic behavior and risk attitude. This study develops a two-agent stochastic differential game model to solve the portfolio choice problem of the asset allocations of gold spot, futures, and cash for market participators who are exposed to inflation risks. The equilibrium prices of spot and futures driven by the volatility rate and co-variances that reflect various risk sources are also determined. Specifically, regarding the choice of hedging tools, market participators may prefer gold spot to futures for the purpose of hedging inflation risk. By capturing the stylistic facts of differential market and multiple agent structures, the article can develop a more reasonable and practical model to usefully explain the gold portfolio choices and pricing in the gold markets. Copyright Springer Science+Business Media New York 2014

Keywords: Portfolio choice; Gold futures; Differential market; Differential game; G11; G12 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s11156-013-0343-2

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