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The Effect of Investor Sentiment on Gold Market Dynamics

Mehmet Balcilar, Matteo Bonato, Riza Demirer and Rangan Gupta

No 201638, Working Papers from University of Pretoria, Department of Economics

Abstract: This paper explores the effect of investor sentiment on the intraday dynamics in the gold market. Using a novel methodology to detect nonlinear causalities, we examine the effect of fear and excitement in the stock market on gold return and intraday volatility at alternative quantiles. While no significant sentiment effect is observed on daily gold returns, we find that sentiment drives intraday volatility in the gold market. Interestingly however, the sentiment effect is channeled via the discontinuous component of intraday volatility and more significantly at extreme quantiles, suggesting that extreme fear (excitement) contributes to positive (negative) volatility jumps in gold returns. The results suggest that measures of sentiment could be utilized to model volatility jumps in safe haven assets that are often hard to predict and have significant implications for risk management as well as the pricing of options.

Keywords: Investor Sentiment; Gold Returns; Intraday Volatility (search for similar items in EconPapers)
JEL-codes: C22 Q02 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2016-05
New Economics Papers: this item is included in nep-mst and nep-rmg
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