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Price Linkages Among Emerging Gold Futures Markets

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Price Linkages Among Emerging Gold Futures Markets

  1. 1. 3rd International Symposium Computational Economics Finance PRICE LINKAGES AMONG EMERGING GOLD FUTURES MARKETS 3rd International Symposium in Computational Economics and Finance (ISCEF) ISCEF 2014, Paris www.iscef.com 1 Hasan F. BAKLACI (Izmir University of Economics-TURKEY) Ömür SÜER (Galatasaray University-TURKEY) Tezer YELKENCI (Izmir University of Economics-TURKEY)
  2. 2. ISCEF Paris || 10-14 April 2014 WHY GOLD FUTURES IN EMERGING MARKETS? 2 The most ancient financial asset. One of the most popular instrument during turmoil periods. The introduction of gold derivatives has enhanced the importance of gold futures. Hasan F. Baklacı Ömür Süer Tezer Yelkenci
  3. 3. ISCEF Paris || 10-14 April 2014 WHY GOLD FUTURES IN EMERGING MARKETS? 3 There is an upward trend in the trading volume of gold futures in emerging markets. In 2012, India’s derivative exchange had the highest silver and gold future transactions in the world. 10 of the top 20 derivative exchanges are located in emerging markets. Untapped area in finance literature. Hasan F. Baklacı Ömür Süer Tezer Yelkenci
  4. 4. ISCEF Paris || 10-14 April 2014 OBJECTIVE 4 To examine the price linkages in gold futures exchanges of four emerging markets: Turkey, India, China, Taiwan. Hasan F. Baklacı Ömür Süer Tezer Yelkenci
  5. 5. ISCEF Paris || 10-14 April 2014 WHY THESE COUNTRIES? 5 I. Size of their gold markets II.The trading activity in their derivative markets Hasan F. Baklacı Ömür Süer Tezer Yelkenci
  6. 6. ISCEF Paris || 10-14 April 2014 WHY THESE COUNTRIES? 6  China, India and Turkey are the top three gold demanders in the world (World Gold Council Report, November 2013).  Turkey is the second largest gold exporter in the world behind Italy.  Turkey and India are among the top three gold producers after Italy.  In the ranking of the top 40 countries based on their official gold holdings worldwide, China, Turkey, India and Taiwan are placed among top 15 countries. Hasan F. Baklacı Ömür Süer Tezer Yelkenci I. Size of their gold markets
  7. 7. ISCEF Paris || 10-14 April 2014 WHY THESE COUNTRIES? 7  Top 30 derivatives exchanges list contained Indian, Chinese, Taiwanese and Turkish derivatives exchanges.  The trading volume in these countries’ derivatives exchanges corresponds to approximately one-fourth of total trading volume in top 30 derivatives exchanges globally.  The trading volume of gold futures traded in these markets represent more than 55% of total gold futures trading listed in the top 20 metals future contracts. (Annual Volume Survey 2012, published by Futures Industry Association). Hasan F. Baklacı Ömür Süer Tezer Yelkenci II. The trading activity in their derivative markets
  8. 8. ISCEF Paris || 10-14 April 2014 RELATED STUDIES 8 • Previous studies related with emerging gold futures markets have investigated predominantly the price discovery function of gold futures for spot market transactions [Pavabutr and Chaihetphon (2010), Thenmozhi and Priya (2011, Ho, Wang and Liou (2010)] • The cross-market price linkage relationships are tested only among developed gold futures markets. Hasan F. Baklacı Ömür Süer Tezer Yelkenci
  9. 9. ISCEF Paris || 10-14 April 2014 RELATED STUDIES 9 • Xu and Fung (2005) : analyzed the patterns of information flows for gold, platinum, and silver futures contracts traded in US and Japanese markets (1994-2001, ARMA-GARCH model). Their results demonstrate a strong pricing transmission between the two markets. However, they also discover that US market seems to lead Japanese market in terms of mutual information flows. • Lin, Chiang and Chen (2008) : investigated the dynamic relationships between US and Japanese gold futures markets (1990-2006, bivariate GARCH model). Their results show that Japanese market leads US in the mean return. Volatility spillover effects are also observed in both markets. Their results, thus, are contradictory to the findings of Xu and Fung. • Aruga and Managi (2011) : investigated the price linkage between the U.S. and Japanese gold and silver futures markets (January 2001-June 2010, causality tests). They uncover that the price linkage between the U.S. and Japanese gold and silver futures markets were led by the U.S. market; results consistent with Xu & Fung. Hasan F. Baklacı Ömür Süer Tezer Yelkenci
  10. 10. ISCEF Paris || 10-14 April 2014 DATA & METHODOLOGY 10  Daily gold futures settlement prices  September 2, 2008 - December 20, 2012 (covers the crisis period)  1075 observations Hasan F. Baklacı Ömür Süer Tezer Yelkenci DATA
  11. 11. ISCEF Paris || 10-14 April 2014 DATA & METHODOLOGY 11  Johansen co-integration test  Vector Error Correction Model Hasan F. Baklacı Ömür Süer Tezer Yelkenci METHODOLOGY
  12. 12. Descriptive Statistics for Gold Future Price Series Turkey Taiwan India China Mean 69.86 4888.72 21022.53 280.84 Median 62.93 4914.51 19672 293.37 Maximum 107.75 6722.51 32636 394.09 Minimum 30.915 2846 11260 155 Standard Dev. 21.86 993.37 6115.05 58.72 Skewness 0.229 -0.123 0.352 -0.314 Kurtosis 1.576 1.846 1.742 1.816 Jarque-Bera 100.14 62.31 93.15 80.41 Probability 0 0 0 0 Observations 1075 1075 1075 1075 ISCEF Paris || 10-14 April 2014 DATA & METHODOLOGY 12 Hasan F. Baklacı Ömür Süer Tezer Yelkenci
  13. 13. ISCEF Paris || 10-14 April 2014 DATA & METHODOLOGY 13  Median values for all countries’ price series are close to the mean values indicating that the data are evenly distributed around the mean.  However, as revealed by Jarque-Berra statistics, the series do not fully conform to a normal distribution.  The kurtosis parameters point out that the price series conform to a platykurtic distribution with wider peak and shorter tail. Hasan F. Baklacı Ömür Süer Tezer Yelkenci DESCRIPTIVE STATISTICS
  14. 14. ISCEF Paris || 10-14 April 2014 DATA & METHODOLOGY 14  Unit root test results (ADF, PP, KPSS) indicate that all the price series are non-stationary.  All the price series exhibit I[1] process. Hasan F. Baklacı Ömür Süer Tezer Yelkenci DIAGNOSTIC TESTS
  15. 15. ISCEF Paris || 10-14 April 2014 DATA & METHODOLOGY 15 Hasan F. Baklacı Ömür Süer Tezer Yelkenci
  16. 16. ISCEF Paris || 10-14 April 2014 DATA & METHODOLOGY 16 Hasan F. Baklacı Ömür Süer Tezer Yelkenci
  17. 17. ISCEF Paris || 10-14 April 2014 RESULTS 17 Hasan F. Baklacı Ömür Süer Tezer Yelkenci Johansen Cointegration Analysis Results 𝜆𝑡𝑟𝑎𝑐𝑒 𝜆 𝑚𝑎𝑥 H0 H1 Statistic Critical Value (5%) H0 H1 Stat. Critical Value (5%) Eigenvalue 𝑟 = 0 𝑟 > 0 123.34* 47.85 𝑟 = 0 𝑟 > 0 106.12* 27.58 0.094 𝑟 ≤ 1 𝑟 > 1 17.21 29.79 𝑟 ≤ 1 𝑟 > 1 9.71 21.13 0.009 𝑟 ≤ 2 𝑟 > 2 7.49 15.49 𝑟 ≤ 2 𝑟 > 2 5.47 14.26 0.005 * denotes rejection of the hypothesis at the 0.05 level.
  18. 18. ISCEF Paris || 10-14 April 2014 RESULTS 18  There is cointegrating relationship among the gold futures price series of sample countries  The results imply a long-term price linkage and dependency among the gold futures markets in the selected countries.  The risk diversification as well as cross- hedging opportunities among these countries gold futures is limited. Hasan F. Baklacı Ömür Süer Tezer Yelkenci Johansen Cointegration Analysis
  19. 19. ISCEF Paris || 10-14 April 2014 19 Hasan F. Baklacı Ömür Süer Tezer Yelkenci Vector Error Correction Model Estimates Variable/Country Turkey Taiwan India China vt-1 -9.78E-05 -0.0138* -0.0083 0.0063* [-1.762] [-3.922] [-0.539] [ 9.793] Turkeyt-1 0.0153 25.4548* 95.2549* 0.7414 [ 0.413] [ 10.818] [ 9.217] [ 1.725] Turkeyt-2 -0.0007 4.8648 29.8796* 0.0444 [-0.019] [ 1.953] [ 2.731] [ 0.097] Taiwant-1 -0.0021* -0.3088* -0.5740* -0.0161* [-3.6735] [-8.344] [-3.531] [-2.395] Taiwant-2 -0.0013* -0.1208* 0.0593 0.0066 [-2.368] [-3.419] [ 0.382] [ 1.029] Indiat-1 0.0005* 0.0494* -0.0749* 0.0025 [ 4.321] [ 6.109] [-2.108] [ 1.716] Indiat-2 -6.89E-05 0.0136 -0.1915* -0.0007 [-0.535] [ 1.663] [-5.329] [-0.533] Chinat-1 -0.0021 -0.4873* -0.1348 0.0779 [-0.792] [-2.861] [-0.180] [ 2.506] Chinat-2 -0.0036 -0.0795 -0.4104 -0.0017 [-1.355] [-0.469] [-0.551] [-0.057] Constant 0.0585 0.8756 16.7151 0.0780 [ 2.165] [ 0.510] [ 2.218] [ 0.249]  * denotes significance at 5% level.  Numbers in square brackets correspond to t-statistics.
  20. 20. ISCEF Paris || 10-14 April 2014 RESULTS 20  Taiwanese gold futures market:  has bidirectional causality with all other countries  has the largest significant speed of adjustment coefficient.  is the single market to correct for the short run deviations from long-run price equilibrium among the four countries’ futures markets.  acts as an anchor market in the establishment of long-term price linkages between the gold futures markets of the sample countries.  Bidirectional causality exists between Taiwan, India and Turkey.  Chinese gold futures market:  has a bi directional causality relationship only with Taiwan.  is relatively isolated market. Hasan F. Baklacı Ömür Süer Tezer Yelkenci Vector Error Correction Model
  21. 21. ISCEF Paris || 10-14 April 2014 RESULTS 21  Trading in Chinese gold futures market is available only for domestic investors.  China had banned foreign banks to import gold since January 2014 and has recently granted gold import licenses to foreign banks. Hasan F. Baklacı Ömür Süer Tezer Yelkenci Why is China isolated?
  22. 22. ISCEF Paris || 10-14 April 2014 CONCLUDING REMARKS 22  Presence of a long-run price linkage & bidirectional causality among the sample countries’ gold futures markets.  Limited risk diversification opportunities between the gold futures markets in majority of these countries.  China is an exception which seems to be a relatively isolated market due to restrictions on gold trading particularly for foreign investors.  Taiwanese market seems to be the most integrated gold futures market among the sample.  Strikingly, the causality results denote that none of the countries in the sample carry a leading role in price discovery and linkage mechanism among the gold futures markets since all causality relationships are bi-directional. Hasan F. Baklacı Ömür Süer Tezer Yelkenci
  23. 23. ISCEF Paris || 10-14 April 2014 CONCLUDING REMARKS 23  This paper is the first study to examine the price linkages and dependencies among emerging gold futures markets.  The policy making issue is particularly important for China, which does not yet allow foreign investors to engage in gold trading in futures markets.  Ascending gold trading volume coupled with the presence of tight cross-market price linkages among the sample countries point out the heightened role of emerging gold futures markets in global perspective. Hasan F. Baklacı Ömür Süer Tezer Yelkenci
  24. 24. Thank you for patience Assoc. Prof. C. Coşkun Küçüközmen OpRisk Turkey 2012, Istanbul www.opriskturkey.com 24 3rd International Symposium in Computational Economics and Finance (ISCEF) ISCEF 2014, Paris www.iscef.com 3rd International Symposium Computational Economics Finance

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