On the efficiency of the global gold markets

Collins Gyakari Ntim · Jacinta C. Nwachukwu · Yan Wang

47 citations0/0 files storedInternational Review of Financial Analysis

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Financial Markets and Investment Strategies Financial Risk and Volatility Modeling Market Dynamics and Volatility

Abstract

This paper examines the weak-form efficiency of the global gold markets with specific focus on the random walks (RWS) and martingale difference sequence (MDS) hypotheses, and consequently, investigates the extent to which predictability or non-predictability of global daily spot gold price return series behaviour can be explained by volatilities in macroeconomic fundamentals. We apply traditional parametric variance-ratio tests and their recent non-parametric modifications based on ranks and signs to one of the largest datasets on world gold markets to-date, consisting of daily spot price series of 28 emerging and developed gold markets from January 1968 to August 2014. First, our results show that gold markets in Egypt, Indonesia, Mexico, Nepal, Pakistan, Russia, Saudi Arabia, UAE and Vietnam are not weak-form efficient neither from the perspective of the strict RWS nor in the relaxed MDS sense. By contrast, RWS and MDS hypotheses cannot be rejected for gold markets in Hong Kong, Japan, Switzerland, UK and US at the conventional rejection levels. Results for gold markets in Australia, Bahrain, Brazil, Canada, China, Germany, India, Malaysia, Singapore, South Africa, South Korea, Taiwan, Thailand and Turkey are, however, mixed. Second, our findings show that greater changes in economic fundamentals are associated with lower levels of rejecting the RWS and MDS hypotheses. Third, our evidence shows that the probability of rejecting the weak-form efficiency is higher in emerging gold markets than developed ones. Fourth, our results show that the RWS hypothesis is rejected more frequently than its MDS alternative, and thereby justifying our decision to conduct an explicit test of the RWS and MDS hypotheses. Our results are robust to estimating subsamples, overlapping rolling windows and endogeneity corrected models, as well as controlling for a number of country-specific institutional and trading factors. Our findings have crucial implications for global portfolio managers, investors, poly-makers and regulatory authorities.

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References

1970Efficient Capital Markets: A Review of Theory and Empirical Work 2008Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches 1965The Behavior of Stock-Market Prices 1988Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test 2010Is Gold a Hedge or a Safe Haven? An Analysis of Stocks, Bonds and Gold 2010Is gold a safe haven? International evidence 1991Chaos and Nonlinear Dynamics: Application to Financial Markets 2005Gold as a hedge against the dollar

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