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The volatility effect on precious metals prices in a stochastic volatility in mean model with time-varying parameters

Mehmet Balcilar () and Zeynel Ozdemir

No 15-34, Working Papers from Eastern Mediterranean University, Department of Economics

Abstract: We use the time-varying parameter stochastic volatility (TVP-SV) model and monthly data from 1962 to 2017 to examine the effect of uncertainty in the precious metal markets (gold, silver, platinum, and palladium). We find evidence that uncertainty has a largely time-varying impact on the precious metal prices. The results also show significant variation in the level of volatility, with high volatility being associated with periods of large volatility shocks corresponding to known historical events. The results show that uncertainty has a significant negative impact on the precious metal prices and the impact is more negative during higher volatility periods, implying that large volatility increases cause crashes in the precious metals markets. The market volatility is also found to be extremely persistent, implying that strong policy measures might be required to restore equilibrium. The estimates also show that price level has a positive and significant effect on the volatility and, thus, higher precious metal prices generates increased future uncertainty.

Keywords: Precious metals; Uncertainty; Stochastic volatility; State–space. (search for similar items in EconPapers)
JEL-codes: C22 E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-rmg
Date: 2018
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http://repec.economics.emu.edu.tr/RePEc/emu/wpaper/15-34.pdf First version, 2017 (application/pdf)

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