Parities and Spread Trading in Gold and Silver Markets: A Fractional Cointegration Analysis

Shi-Miin Liu and Chih-Hsien Chou

Applied Financial Economics, 2003, vol. 13, issue 12, 899-911

Abstract: This article tries to disclose true parity relationships between gold and silver prices using fractional cointegration analysis. Both gold-silver and silver-gold parities are slow-adjustment long-memory processes with a time-varying risk premium. Information exposed by the parities is extremely useful in relatively long-run spread trading in the precious metal markets. Significant riskless profits could be earned based on the general ECMs' forecasting of the changes of the futures and cash spreads between gold and silver. The performance problem of gold and silver markets as a whole, therefore, is obvious.

Date: 2003
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DOI: 10.1080/0960310032000129626

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