Risk management of precious metals

Shawkat Hammoudeh, Farooq Malik and Michael McAleer

No EI 2010-48, Econometric Institute Research Papers from Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute

Abstract: This paper examines volatility and correlation dynamics in price returns of gold, silver, platinum and palladium, and explores the corresponding risk management implications for market risk and hedging. Value-at-Risk (VaR) is used to analyze the downside market risk associated with investments in precious metals, and to design optimal risk management strategies. We compute the VaR for major precious metals using the calibrated RiskMetrics, different GARCH models, and the semi-parametric Filtered Historical Simulation approach. Different risk management strategies are suggested, and the best approach for estimating VaR based on conditional and unconditional statistical tests is documented. The economic importance of the results is highlighted by assessing the daily capital charges from the estimated VaRs. The risk-minimizing portfolio weights and dynamic hedge ratios between different metal groups are also analyzed.

Keywords: conditional volatility; precious metals; risk management; value-at-risk (search for similar items in EconPapers)
JEL-codes: G1 (search for similar items in EconPapers)
Date: 2010-07-29
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Related works:
Journal Article: Risk management of precious metals (2011)
Working Paper: Risk Management of Precious Metals (2011)
Working Paper: Risk Management of Precious Metals (2011)
Working Paper: Risk Management of Precious Metals (2010)
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