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Published in: Empirical Economics 3/2016

16-11-2015

Testing explosive behavior in the gold market

Authors: Wei Long, Dingding Li, Qi Li

Published in: Empirical Economics | Issue 3/2016

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Abstract

This paper examines the explosive behavior in the gold market. Using the generalized sup ADF (GSADF) test introduced by Phillips et al. (Testing for multiple bubbles. Cowles Foundation Discussion Paper No. 1843, 2012), we quantitatively examine the existence of explosive periods in the gold market during the period between 1968 and 2013. The date-stamping strategy associated with the test provides a real-time estimation for the origination and termination dates of each explosive period in the gold market, and several explosive periods, including both the famous 1980 explosion and the most recent 2011 explosion, are identified. Our results also demonstrate that, when multiple explosive periods exist within a specific time interval, the GSADF test is more accurate and effective in detecting them than the approach introduced by Phillips et al. (Int Econ Rev 52(1):201–226, 2011), which is relatively conservative. This paper provides further evidence that gold is the safe haven for assets under huge risk and the gold price reacts to political and economic uncertainties relatively faster than other selected commodities do.

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Footnotes
1
Harry ‘Rabbit’ Angstrom, the central character in John Updike’s 1970s novels about American suburban life.
 
2
The US gold standard ended in 1933. During 1934–1973, which Elwell (2011) called a “quasi gold standard” period, “although there was no private market for gold in the USA, such markets did exist abroad. By the late 1960s, prices in these markets were tending to deviate from official currency prices.” By abandoning its commitment of convertibility between dollar and gold and stopping the endeavor of stabilizing the exchange rate between the dollar and other currencies, the US ended the Bretton Woods System established after the WW II. Since then, the gold price fluctuates based on the supply and demand relationship.
 
3
Source: London Bullion Market Association. Otherwise specified, the unit for the gold price in this paper is US Dollars per Troy Ounce.
 
4
We thank a referee for pointing out this.
 
5
We thank a referee for pointing out Stiglitz’s definition for a bubble.
 
6
The quotes are obtained by averaging the daily price within biweekly ending on Wednesday.
 
7
One is at 10:30 A.M. and the other is at 3:00 P.M.
 
8
The official Web site of London Gold Fixing provides more details.
 
9
The base year is 1983. The data are retrieved from the Bureau of Labor Statistics. One referee has suggested to consider some other pricing deflators. We additionally considered the Producer Price Index (PPI) and obtained quite similar empirical results, which are available upon request.
 
10
Even though the subprime mortgage crisis emerged in 2006 when there was a dramatic increase in mortgage delinquencies and foreclosures and the housing price fell significantly in the USA, Phillips and Yu (2011) treated August of 2007 as the beginning date of the crisis, when German government officials organized a $5 billion bailout of IKB, a small bank in Germany, at the end of July.
 
11
Mills (2004) has actually combined the two explosive periods as a single one.
 
12
Phillips and Yu (2011) detected that the crude oil and heating oil price bubbles appear in March of 2008 while the bond spread bubbles appear in September of 2008. See (Phillips and Yu 2011, P. 482).
 
13
The Shine Is Off, Slate, by Nouriel Roubini.
 
14
See p. 28, Phillips et al. (2012).
 
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Metadata
Title
Testing explosive behavior in the gold market
Authors
Wei Long
Dingding Li
Qi Li
Publication date
16-11-2015
Publisher
Springer Berlin Heidelberg
Published in
Empirical Economics / Issue 3/2016
Print ISSN: 0377-7332
Electronic ISSN: 1435-8921
DOI
https://doi.org/10.1007/s00181-015-1030-z

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