 Rationality in Precious Metals Forward Markets: Evidence of Behavioural Deviations in the Gold MarketsRaj Aggarwal, Brian Lucey and Fergal O'Connor () The Institute for International Integration Studies Discussion Paper Series from IIIS Abstract: We offer the first examination of whether the gold forward rate is an unbiased predictor of the future gold spot rate. We find strong evidence that it is not, particularly at longer maturities. Building on Aggarwal and Zong's (2008) approach to allow for investor risk aversion, we then examine if these deviations from rationality can be explained by behavioural factors such as market optimism and over-reaction to news. We find that forecast errors in the gold market generally suffer from overreaction to observed spot price changes but underreact to outflows of gold from Exchange Traded Funds. Further, the forward premium is found to be a consistently optimistic estimate over the full sample. Finally, while the market mood is shown to vary greatly over time, swinging from pessimism in the 1990's to optimism after 2000, the forecast revision overreaction is found to be consistently stable over the full sample. These are significant, important, and consistent indications of seemingly non-rational behavioural effects in the gold forward market. Keywords: gold; gold forward rate; behavioural; forecast errors; forecast revisions; pessimism; overreaction; Exchange Traded Funds (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:iis:dispap:iiisdp462 Access Statistics for this paper More papers in The Institute for International Integration Studies Discussion Paper Series from IIIS 01. Contact information at EDIRC. |
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