Forecasting volatility of gold: Comparison of Turkish gold and equity markets’ risk profile

Abstract

Abstract. Predicting price changes of a commodity thus, forecasting volatility thereof have significant importance for the risk measurement purpose. Perception is that the highly volatile assets overreact more under stressed market conditions, cause excessive volatility and are traded with a discount. In this paper, we evaluated volatility structure of gold and equity markets in Turkey with GARCH volatility modeling methodology, an extended version of ARCH model. Comparison of volatility clustering and overall risk profile of both markets was made. The results show that persistence exists in the volatility process and current conditional volatility of gold prices is significantly impacted by its own past shocks and volatility. The results also confirms the volatility clustering that high volatilities are likely to be pursued by high ones and vice versa in both gold and equity markets. Parallel to literature finding, gold is a diversification instrument because of its low correlation with stock markets and its low risk profile feature induced with low volatilities in gold markets than equity markets. Keywords. Gold, Equity, Volatility, Risk. JEL. G10, G11, G15.