Gold Futures Research Articles

Impact of Commodity Transaction Tax on Liquidity and Volatility of Gold Futures Traded at MCX

This paper tests the impact of the commodity transaction tax (CTT) introduced in Indian commodity market since July 2013, particularly on market liquidity and volatility aspects. We rely on a distinctive design of the tax, which is imposed only on non agri-commodities. Here, we considered Gold as a proxy for non agri-commodities and MCX agri-index as a proxy for agri-commodities. This provides one control group and one treatment group which allows us to use Difference in Difference approach in order to isolate the impact of the tax from other economic changes that have happened simultaneously. We find that CTT significantly reduces trading and turnover in Gold futures market. The test for conditional variance using GARCH (1,1) model, reveal that CTT did not significantly contributed to volatility contradiction as expected by policy makers. As the results expressed increased volatility in treatment commodity introducing CTT, similar to that of control group, this paper suggests repealing of CTT on non-agri commodities.

CTT Infuses Inefficiency into Gold Futures Trading: An Empirical Analysis

The rationale behind introduction of CTT by government of India is still unclear. But as per few experts, revenue generation was the topmost priority behind the imposition of CTT, besides checking price volatility. In this study by adopting the bootstrap, and modified GARCH methodology, we assessed the impact of CTT in non-agriculture futures commodities with special reference to gold futures traded in MCX. The study finds that CTT has increased the price volatility in gold futures and has significantly reduced the turnover in trading volume, weakening the market to great extent. The imposition of CTT not only affected the gold futures market but also contributed to the inefficiency of the market as the market has still not yet been able to digest the shock that it had received after the implementation of CTT. As per the revenue generation is concerned, if sole purpose for introducing CTT in the commodity futures market was to increase the revenue, than it is not suitable for development of commodity futures market, because CTT has already increased the transaction cost, and market players have already responded to it as volume came down approximately to 43% to 53%. We conclude that CTT has direct impact on policy aspirations as there is a need to transform Indian markets into 'price setter' from being 'price takers'.

A comparison of bid-ask spread proxies: evidence from Borsa Istanbul futures

We analyze the performance of five different methods appearing in the market microstructure literature in predicting effective and quoted bid-ask spreads (Roll, LOT Mixed, Effective Tick, High-Low and Closing Percent Quoted Spread proxies). With data from index futures, currency futures and gold futures traded in Borsa Istanbul and taking percent effective and percent quoted spreads obtained from intraday trade and quote data as benchmarks, we calculate and compare the correlations and root mean square errors of the spread measures. Results show that none of the proxies is successful enough in estimating effective or quoted spread although under normal market conditions, Effective Tick appears to perform best. Keywords: bid-ask spread, Borsa Istanbul, futures market JEL Classification: G10, G14, G23

The information content of implied volatility and jumps in forecasting volatility: Evidence from the Shanghai gold futures market

This paper investigates the information content of the CBOE Gold ETF Volatility Index (GVZ) and jumps in forecasting realized volatility of the Shanghai gold futures market. We find strong in-sample evidence that the GVZ and jumps are significant and both greatly improve next day volatility forecasts. Also, these results are robust when the recent financial crisis is considered. Further, out-of-sample analysis confirms that the GVZ and jumps are important factors in forecasting future volatility. More important, we show that the GVZ outperforms jumps in terms of forecasting performance.

An Empirical Study on the Information Transmission Mechanism Among Korea, USA and UK Gold Spot and Futures Markets

An Empirical Study on the Information Transmission Mechanism Among Korea, USA and UK Gold Spot and Futures Markets

Price Discovery in the Chinese Gold Market

This study conducts price discovery analysis in the Chinese gold market. Our result indicates that the price discovery in Chinese gold market occurs predominantly in the futures market. The result is robust to the different measures of price discovery, namely information share, component share, and information leadership share. Partitioning the daily trades into three trading sessions, we find that the dominance of the futures market occurs in all trading sessions. We further investigate the sequential price discovery within the spot market or futures market. We find that the price discovery of gold spot market and gold futures market occur in the night trading session.

GOLD HEDGING STRATEGIES IN THE ASIAN MARKETS

During 2007, the gold price was declining due to effect from Global Financial Crisis. After this period, gold price suffered significant drop due to low inflation among countries.Hedging is a tool to mitigate risk and uncertainty in gold prices. This research analyzed the relationship between gold spot and futures prices in the Asian markets (Singapore, Thailand, Indonesia, Malaysia, Tokyo, Korea, Shanghai and Hong Kong) and London market. This study also investigated the ability of gold futures as a hedging tool to gold spot during financial market stress. The investigation employed multivariate GARCH and OLS models for optimal hedge ratio estimation of gold futures. Sample data consists of daily gold spot and futures prices denoted in US dollars per troy ounces. There are four sub–periods (Period I, Period II, Period III and Period IV) considered which covers from 2nd February 2009 until 31st October 2014 of 1500 observations. Using Diagonal BEKK model, it can be suggested that one dollar long (buy)in gold spot should be shorted (sold) by about 78.26 cents of Thailand gold futures during the crisis period and Thailand futures market of 74.85 cents for the post crisis period. It can be argued that hedging effectiveness is higher during global financial crisis as compared to post global financial crisis. It is observed that Diagonal BEKK outperformed minimum variance, CCC and DCC models.

Outperforming benchmarks with their derivatives: theory and empirical evidence

Recent literature has demonstrated the existence of an unbounded risk premium if one combines the most important models for pricing and hedging derivatives with coherent risk measures. There may exist combinations of derivatives (good deals) whose pair (return risk) converges to the pair (+∞, −∞). This paper goes beyond existence properties and looks for optimal explicit constructions and empirical tests. It will be shown that the optimal good deal above may be a simple portfolio of options. This theoretical finding will enable us to implement empirical experiments involving three international stock index futures (Standard & Poor's 500, Eurostoxx 50 and DAX 30) and three commodity futures (gold, Brent and the Dow Jones-UBS Commodity Index). According to the empirical results, the good deal always outperforms the underlying index/commodity. The good deal is built in full compliance with the standard derivative pricing theory. Properties of classical pricing models totally inspire the good deal construction. This is a very interesting difference in our paper with respect to previous literature attempting to outperform a benchmark.

Components of the Bid–Ask Spread and Variance: A Unified Approach

We develop a structural model for the price formation and liquidity supply of an asset. Our model facilitates decompositions of both the bid–ask spread and the return variance into components related to adverse selection, inventory, and order processing costs. Furthermore, the model shows how the fragmentation of trading volume across trading venues influences inventory pressure and price discovery. We use the model to analyze intraday price formation for gold futures traded at the Shanghai Futures Exchange. We find that order processing costs explain about 50% of the futures bid–ask spread, whereas the remaining 50% is equally due to asymmetric information and to inventory costs. About a third of the variance in futures returns is attributable to microstructure noise. Trading at the spot market has a significant influence on futures price discovery, but only a limited impact on the futures bid–ask spread. © 2016 Wiley Periodicals, Inc. Jrl Fut Mark 36:545–563, 2016

Cross-correlations between price and volume in Chinese gold markets

We apply the multifractal detrended cross-correlation analysis (MF-DCCA) method to investigate the cross-correlation behaviors between price and volume in Chinese gold spot and futures markets. Qualitatively, we find that the price and volume series are significantly cross-correlated using the cross-correlation test statistics Qcc(m) and the ρDCCA coefficients. Quantitatively, by employing the MF-DCCA analysis, we find that there is a power-law cross-correlation and significant multifractal features between price and volume in gold spot and futures markets. Furthermore, by comparing the multifractality of the original series to the shuffled and surrogated series, we find that, for the gold spot market, the main contribution of multifractality is fat-tail distribution; for the gold futures market, both long-range correlations and fat-tail distributions play important roles in the contribution of multifractality. Finally, by employing the method of rolling windows, we undertake further investigation into the time-varying features of the cross-correlations between price and volume. We find that for both spot and futures markets, the cross-correlations are anti-persistent in general. In the short term, the cross-correlation shows obvious fluctuations due to exogenous shocks while, in the long term, the relationship tends to be at a metastable level due to the dynamic mechanism.

Of Ponzi schemes and investment scams

Purpose – This paper aims to chart the enforcement actions taken by the Malaysian regulatory authorities in relation to illegal investment schemes in Malaysia, and clarifies the various strategies adopted by the Malaysian regulatory authorities to ensure protection of investors in the capital market. The enforcement actions relate to the Swisscash scheme as well as commodities futures involving crude palm oil and a more recent case involving gold futures. These schemes share similar characteristics with Ponzi schemes that were thrust into the international limelight in the notorious Madoff Ponzi scheme and its allegation of regulatory failure. Design/methodology/approach – The paper clarifies, by way of case study, public enforcement of illegal investment schemes promoted through the Internet and schemes involving cross-border investments. Findings – The enforcement powers of the regulatory authorities in Malaysia are being utilized to ensure compliance with the law. The enforcement actions by the regulatory authorities in the afore-stated cases are significant in view of the successful custodial sentence of imprisonment, the regulators’ public enforcement action intended to compensate investors and the most recent case which is unfolding, due to the large number of alleged perpetrators and significant wealth transfer involved. Originality/value – Given the allegation of regulatory failure in other jurisdictions, this paper enables a view to be formulated of the timeliness and appropriateness of the enforcement actions.

Impact of Gold and Crude Oil on Stock Market Volatility in India

India is the fourth largest importer of Crude oil and the largest importer of Gold in the world. Trading in Crude Oil, Gold, Crude Futures and Gold Futures on Organized exchanges began in 2005 in India. Since, India is a price-taker, the escalating price of these commodities and their Futures flares up uncertainty in the economy, as reflected in the Volatility in the Stock Market. The purpose of the study is to highlight the effect of returns of Crude Oil, Gold, Crude Futures and Gold Futures on the Volatility in the Indian Stock Market. The study reveals that Crude Oil, Gold and Crude Futures have a significant impact on the stock Market Volatility in India. The study is useful for the policy makers and the government to take measures to reduce reliance on imported goods and harness alternative sources for sustainable economic growth.

Forecasting on Commodity Derivatives Market with Special Reference to Gold and Silver

This research attempts, to forecast the commodity market through the frame general equation. The data for the study consists of four month's contract futures prices and spot prices. To forecast the prices, we applied ARIMA model. The ARIMA model fit the lags (p, d, q) 2 1 3 model for Futures (Gold) and ARIMA (p, d, q) 2 1 2 model for Spot (Gold), Futures (Silver) and Spot (Silver) and the standard error lies within the accepted limits, so the model is more appropriate one.

Modelling the Impact of Government Policies on Import on Domestic Price of Indian Gold Using ARIMA Intervention Method

The study attempts to determine the impact of government policies of import of gold in India on the domestic price of gold during 2013 using Autoregressive Integrated Moving Average (ARIMA) intervention model. 2013 was an amazing year for Indian gold market where the price had reached its zenith. In April 2013, to curb a record trade deficit, India imposed an import duty of 10 percent on gold and tied imports for domestic consumption to exports, creating scarce supply of the yellow metal and boosting premiums to curtail the Current Account Deficit (CAD). The objective of the paper is to model the impact of this intervention by the government on the domestic price of Indian gold. Suitable ARIMA model is fit on the preintervention period and thereafter the effects of the interventions are analysed. The results indicate that ARIMA(1,1,1)is the most suitable model during preintervention period. Intervention analysis reveals that there is significant decrease in domestic price of gold by 56% from 2013. The model may be used by policymakers to analyse the future of gold before framing regulations and policies.

Is Gold a Hedge Against Inflation? A Wavelet Time-Frequency Perspective

Among the many presumed characteristics of gold, the ability to act as an enduring store of value is frequently noted. In this paper, the ability of gold to dynamically hedge against inflation is examined for various holding periods using the continuous wavelet transformation. Gold is first established as both a short- and long-term hedge against realized inflation for a number of developed economies. Dynamic analysis demonstrates that these hedging properties are not limited to a single historical cohort. Next, gold is shown to co-move with unexpected inflation across all countries examined, albeit with some variation in the direction of the relationship. Finally, the ability of both gold futures and gold stocks to act as a hedge against inflation is demonstrated.

Volatility Linkages Among Gold Futures in Emerging Markets

ABSTRACTWe aim to detect the cross-border volatility linkages among gold futures in emerging markets, which still remain an untapped area. China, India, Japan, Taiwan, Turkey, and U.S. futures markets are included in the sample. The volatility linkage analyses confirm the existence of volatility transmission among the majority of the sample countries’ gold futures. This article carries vital inferences and implications for policy makers and investors. The policy making is particularly important for China, which is a relatively isolated market. From investors’ perspective, the results indicate that the risk diversification and cross-market hedging opportunities in the emerging gold futures markets are quite limited.

The golden target: analyzing the tracking performance of leveraged gold ETFs

Purpose – The purpose of this study is to understand the tracking errors of leveraged exchange-traded funds (LETFs) on gold and demonstrate improved tracking performance by dynamic portfolios of gold futures. Design/methodology/approach – The author formulates and solves a constrained quadratic minimization problem to construct static replicating portfolios of both leveraged and unleveraged benchmarks in gold; a dynamic constant leveraged portfolio using gold futures is used to track the path of the leveraged gold benchmark. Findings – The results suggest that market-traded LETFs do not track a leveraged position in gold effectively over a long horizon, and the dynamic leveraged futures portfolio achieves lower tracking errors over multiple years. Research limitations/implications – The research informs us that investors should consider alternative portfolios with gold futures, rather than holding a leveraged gold exchange-traded funds to achieve a desired leveraged exposure in spot gold. Originality/value – The main contribution of the study is the use of gold futures to dynamically replicate a gold benchmark with any given leverage ratio and the detailed comparison of the tracking performance of LETFs versus optimal static and dynamic futures portfolios.

Detrended partial cross-correlation analysis of two nonstationary time series influenced by common external forces.

When common factors strongly influence two power-law cross-correlated time series recorded in complex natural or social systems, using detrended cross-correlation analysis (DCCA) without considering these common factors will bias the results. We use detrended partial cross-correlation analysis (DPXA) to uncover the intrinsic power-law cross correlations between two simultaneously recorded time series in the presence of nonstationarity after removing the effects of other time series acting as common forces. The DPXA method is a generalization of the detrended cross-correlation analysis that takes into account partial correlation analysis. We demonstrate the method by using bivariate fractional Brownian motions contaminated with a fractional Brownian motion. We find that the DPXA is able to recover the analytical cross Hurst indices, and thus the multiscale DPXA coefficients are a viable alternative to the conventional cross-correlation coefficient. We demonstrate the advantage of the DPXA coefficients over the DCCA coefficients by analyzing contaminated bivariate fractional Brownian motions. We calculate the DPXA coefficients and use them to extract the intrinsic cross correlation between crude oil and gold futures by taking into consideration the impact of the U.S. dollar index. We develop the multifractal DPXA (MF-DPXA) method in order to generalize the DPXA method and investigate multifractal time series. We analyze multifractal binomial measures masked with strong white noises and find that the MF-DPXA method quantifies the hidden multifractal nature while the multifractal DCCA method fails.

The Return-Volatility Relation in Commodity Futures Markets

By employing a continuous time stochastic volatility model, the dynamic relation between price returns and volatility changes in the commodity futures markets is analysed. An extensive daily database of gold and crude oil futures and futures options is used to estimate the model that is well suited to assess the return-volatility relation for the entire term structure of futures prices. The empirical results indicate a positive relation in the gold futures market and a negative relation in the crude oil futures market, especially over periods of high volatility principally driven by market-wide shocks. However, the opposite reaction occurs over quiet volatility periods when typically commodity-specific effects dominate. As leverage effect, volatility feedback effect and inventory effect do not adequately explain this reaction especially for the crude oil futures, the convenience yield effect is proposed. Accordingly, commodity futures markets in backwardation entail a positive relation, while futures markets in contango entail a negative relation.

State-dependent jump risks for American gold futures option pricing

In this study, we investigate the valuation of American-style options when the underlying gold futures price follows a pure diffusion structure with state-dependent jump dynamics. Under such dynamics, the jump events are described as a compound Poisson process with a log-normal jump amplitude, and the regime-switching arrival intensity is captured by a hidden Markov chain whose states represent the economic states. Considering the different jump risk assumptions, we use the Merton measure and Esscher transform to derive risk-neutral gold futures price dynamics under an incomplete market setting. To achieve a desired accuracy level, the least-squares Monte Carlo method is used to approximate the values of American gold futures options. Our empirical and numerical results based on actual market data are provided to illustrate the importance of incorporating state-dependent jump risks when pricing American put options on gold futures.