Financial uncertainty and gold market volatility
Evidence from a generalized autoregressive conditional heteroskedasticity variant of the mixed-data sampling (GARCH-MIDAS) approach with variable selection
Publication date
2024-12-12
Document type
Forschungsartikel
Author
Organisational unit
Scopus ID
Publisher
MDPI AG
Series or journal
Econometrics
Periodical volume
12
Periodical issue
4
ISBN
Article ID
38
Is a version of
Peer-reviewed
✅
Part of the university bibliography
✅
Language
English
Keyword
adaptive LASSO
financial uncertainty
gold price volatility
Abstract
We analyze the predictive effect of monthly global, regional, and country-level financial uncertainties on daily gold market volatility using univariate and multivariate GARCH-MIDAS models, with the latter characterized by variable selection. Based on data over the period of July 1992 to May 2020, we highlight the role of the global financial uncertainty factor in accurately forecasting gold price volatility relative to the benchmark GARCH-MIDAS-realized volatility model, with a dominant role of European financial uncertainties, and 36 out of the 42 regional financial market uncertainties. The forecasting performance of the global financial uncertainty factor is as good as an index of global economic conditions, with results based on a combination of these two models depicting evidence of complementary information. Moreover, the GARCH-MIDAS model with global financial uncertainty cannot be outperformed by the multivariate version of the GARCH-MIDAS framework, estimated using the adaptive LASSO, involving the top five developed and developing countries each, chosen based on their ability to explain the movements of overall global financial uncertainty. Our results imply that as financial uncertainties can improve the accuracy of the forecasts of gold returns volatility, it would help investors to design optimal portfolios to counteract financial risks. Also, as gold returns volatility reflects financial uncertainty, accurate forecasts of it would provide information about the future path of economic activity, and assist policy authorities in preventing possible economic slowdowns.
Description
This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https://creativecommons.org/licenses/by/4.0/).
Version
Published version
Access right on openHSU
Metadata only access