Volatility Factors of Returns and Risk Analysis Using Quantile Risk Measures in the Gold and Silver Market

Dominik Krężołek

doi:10.18778/0208-6018.355.03

Abstract

The aim of the paper is to identify unobservable factors that may significantly determine the level of gold and silver returns and to assess the risk of investment in these metals. To measure risk, the value at risk and other, less popular measures are used: the ES, MS, Rachev ratio and GlueVaR risk measure. Normal and Student’s t‑distributions are used as theoretical distributions. The results of the study show that we can identify latent factors based on observable variables that have a significant impact on the level of gold and silver returns. In addition, it was observed that the risk measures would vary depending on the period of research. It was shown that the estimates of the risk measures using Student’s t‑distribution have a lower estimation error than those based on the normal distribution.

Highlights

The contemporary economy is an extremely complicated construct, despite numerous regulations
The main aim of the analysis is to assess the impact of factors on changes in the level of gold and silver returns and to compare investment risk related to these metals
The first one is related to modelling returns for gold and silver using some unobservable factors, whereas the second one is related to comparative analysis of risk in terms of volatility observed in returns on investment in gold and silver

Summary

Introduction

The contemporary economy is an extremely complicated construct, despite numerous regulations. The first one is related to modelling returns for gold and silver using some unobservable factors, whereas the second one is related to comparative analysis of risk in terms of volatility observed in returns on investment in gold and silver. The choice of these two metals is dictated by their investing nature. Some key factors determining the level of gold and silver returns (Borowski, 2008; Kasprzak‐Czelej, 2016) are as follows: – exchange rates, – inflation and interest rates, – increase of income and the global economic situation, – financial market disturbances, – political risk, – volatility of prices of strategic raw materials (i.e., crude oil), – speculation, – supply. All of these factors are unpredictable, they generate risk associated with volatility observed in returns

Literature review

Measures of extreme risk

Empirical study of gold and silver markets

Findings

Remarks and conclusions