The Effect of CME Gold Futures and Ice Dollar Index Futures on the KRX Gold Market

Abstract

The KRX (Korea Exchange) gold market opened in March 2014 according to the government policy legalizing financial transactions, and traded one-gram unit of real gold by Korean currency (KRW) in the exchange market. Despite the fact that the KRX gold market shows high efficiency in terms of taxes and fees in contrast to the existing gold market, studies on the KRX gold market have been rarely conducted until quite recently. We explore the KRX gold market price efficiency by showing price discovery factors in the market. According to the existing studies, the futures market has a characteristic of leading the spot market. Therefore, this study put forward a hypothesis that the return rate of the gold in the CME (Chicago Mercantile Exchange), in which gold futures are traded at night in Korea Standard Time, would have a positive impact on the return of the KRX gold market, which starts at 9:00am the following day. In addition, this paper goes into detail about the international gold price having a negative correlation with the value of the United States (US) dollar. To test the goal of the research, both the return rate of CME gold futures at t-1 days and ICE (Intercontinental Exchange) dollar index futures at t-1 days are investigated to determine whether they have an impact on the market rate of return in the KRX gold market at t day using regression analysis and vector auto-regression (VAR) model in order to look closely at the factors that determine the market price of the KRX gold market. First, the return rate of CME gold futures at t-1 days has a positive impact of significance on the market rate of return in the KRX gold market at t day. Second, the return rate of ICE dollar index futures at t-1 days could not be confirmed to significantly determine the market rate of return in the KRX gold market at t day.