All that Glitters is NOT Gold Evidence from Noise Trading and Gold Markets. Dr. Priti Verma Associate Professor

Transcription

1 All that Glitters is NOT Gold Evidence from Noise Trading and Gold Markets Dr. Priti Verma Associate Professor

2 Background Conventional Finance Theories Investors are rational wealth maximizers Make decisions based on company s fundamentals Some investors do not make investment decisions based on a company s fundamentals Emotions and psychology have influenced investors decision causing them to make irrational decisions Influence asset prices by way of changes in their sentiments

3 Noise Traders A subset of investors Definitions Do not make investment decisions based on a company s fundamentals Influence stock prices by changes in their sentiments Volatility is a measure of riskiness of any asset

4 Background Some individuals may behave irrationally, sometimes for extended periods of time Finance more receptive to irrational explanations Investor sentiments have become an important determinant of asset prices First given by Black (1986), Trueman (1988)

5 Background Several empirical studies examine the influence of investor sentiments on stock returns (Da, Engelberg and Gao, 2015; Huang et. at., 2014; Corredor, Ferrer and Santamaria, 2013; Baker, Wurgler and Yuan, 2012; Chung, Hung, Yeh, 2012; Verma and Verma 2008, 2007; Brown and Cliff, 2004; Lee et al. 2002; Lee et al. 2002; Fisher and Statman, 2000; Clarke and Statman, 1998; Solt and Statman 1988; De Bondt, 1993) Recognize the existence of both individual and institutional investor sentiments

6 Role of Gold in the Financial System Investors have used gold as a means of exchange, store of value and as a hedge against inflation Investors have included gold in their portfolio to: Enhance diversification benefits (Sherman, 1982; McCown and Zimmerman, 2006; Draper et. al, 2006) Hedge against exchange rate risk (Capie et.al., 2005; Joy, 2011) Hedge against stocks (Baur and Lucy, 2010; Baur and McDermott, 2010; Joy, 2011; Anand and Madhogaria, 2012)

7 Role of Gold in the Financial System Investors have invested in GLD The largest gold exchange traded fund Has a value of over $30 billion as of early 2016 Central banks all over the world hold gold as reserves to protect the value of their currency Demand for the physical gold for investment is over 2500 tons in 2015

8 Gold and Sentiments Individual and institutional investors have increasingly added gold to their portfolio Extant literature that examines the impact of investor sentiments on stock prices This relationship is yet to be established in the gold market It is important to understand how investor sentiments impact their returns in the gold market To optimize portfolio allocation and to make rational choices

9 Significance Traditional finance classes are based on the assumption that investors are rational Irrational cognitive biases, emotions and investor psychology can make a significant impact on their investment decisions. New area of finance is called behavioral finance. Comparing and contrast decisions made by the individuals and firms based on traditional finance and behavioral finance See how those decisions based on behavioral finance deviate from those predicted by traditional finance theories.

10 Contribution First, previous studies examine the relationship between noise trading, stock returns and volatility Looks at the impact of noise trading on gold Analyzes the impact of individual and institutional sentiments on gold Second, this study examines the asymmetric behavior of both individual and institutional sentiments on gold volatility Distinguishing between bullish and bearish sentiments.

11 Contribution Third, this is the first study that examines the impact of individual and institutional investor sentiments on gold Part of a well-diversified portfolio of several investors

12 Research Questions To what extent do individual and institutional investor sentiments impact the returns in the gold market? To what extent do individual and institutional investor sentiments impact the volatility of returns in the gold markets? Is there any asymmetric response of bullish and bearish individual and institutional investor sentiments on gold market?

13 Variables and Data Weekly data from December 2000 to November 2011 Individual Investor sentiment index by American Association of Individual Investors Based on Brown and Cliff (2004), Fisher and Statman (2000), DeBondt (1993) Institutional investor sentiment index by Investors Intelligence Based on Brown and Cliff (2004, 2006), Lee et al. (2002), Clarke and Statman (1998), and Solt Statman (1988)

14 Variables and Data Gold Bullion and Gold Futures DataStream International Multivariate exponential generalized autoregressive conditionally heteroscedastic (E-GARCH) (Nelson,1991; Koutmos & Booth,1995; Koutmos,1996)

15 Preliminary Results of Multivariate EGARCH MLE for the EGARCH model Sentiments Returns Individual Institutional Gold Bullion Gold Futures Sentiments Volatility Individual Institutional Gold Bullion Gold Futures Asymmetry Gold Bullion Gold Futures -0.07

16 Conclusions Positive effects of individual and institutional investor sentiments on returns on gold Negative effects of individual and institutional investor sentiments on volatility on gold Asymmetric responses of bullish and bearish individual and institutional sentiments on gold Overall, these findings would suggest that noise is a priced risk factor in the gold market

17 Thank you!!!