A Study of Excess Volatility of Gold and Silver

Abstract

This paper discusses the case of strong path dependency in asset prices from the theoretical and empirical standpoints. Specifically, it demonstrates persistence of excess volatility in the gold spot price data that engenders excessive path dependence, whereas it is not the same with silver. For this study, we use the extreme value estimator proposed by Rogers and Satchell (1991) and the VRatio proposed by Maheswaran et al (2011). The data for the study is for the period from January, 2001 to October, 2015. We use multiple-days’ time horizons for examining the excess volatility with a better approximation of Brownian motion in the data. We capture the excess volatility in the gold data using the Binomial Markov Random Walk model. In this paper, we also utilize a new measure of risk called the Expected Lifetime Shortfall (ELS) ratio, to test for the presence of mean reversion in asset prices. Using this ratio, one can observe that the strong mean-reverting characteristic in gold makes it a better investment choice than silver, in general, in the medium term.