Heterogeneous expectations in the gold market: Specification and estimation

Abstract

The increase in the price of gold between 2002 and 2011 appears to be a candidate for a potential asset price 'bubble', suggesting that chartists (feedback traders) were highly active in the gold market during this period. Hence, this paper develops and tests empirically several models incorporating heterogeneous expectations of agents, specifically fundamentalists and chartists, for the gold market. The empirical results show that both agent types are important in explaining historical gold prices but that the 10-year bull run of gold in the early 2000s is consistent with the presence of agents extrapolating long-term trends. Technically this paper is a further step toward providing an empirical foundation for certain assumptions used in the heterogeneous agents literature. For example, the empirical results presented in this paper compare the economical and statistical significance of numerous switching variable specifications, that are generally only introduced ad-hoc.

Does gold act as a hedge or a safe haven for stocks? A smooth transition approach

“…In contrast, Baur and Glover [2012] identify that the price of gold followed an explosive price process between 2002 and 2012 using a test developed by Phillips, Wu and Yu [2011]. Lucey and O'Connor [2013] and Baur and Glover [2014] come to a similar conclusion.…”

Heterogeneous Beliefs and Asset Price Dynamics: A Survey of Recent Evidence

“…Switching functions may vary. For an evaluation of different switching functions, see Baur and Glover (2014). The example we show is an adapted multinomial logit rule from Hommes (1997, 1998) and similar to ter Ellen and Zwinkels (2010).…”

“…Not much later, Winker and Gilli (2001) and Gilli and Winker (2003) also for less obvious asset classes, such as oil (ter Ellen and Zwinkels, 2010), housing (Kouwenberg and Zwinkels, 2014), gold (Baur and Glover, 2014), options (Frijns et al, 2010), hedge funds (Schauten et al, 2015), and credit markets (Chiarella et al, 2015).…”

“…Reitz and Slopek (2009) Baur and Glover (2014) find that investors in the gold market are heterogeneous.…”

Comparing Behavioural Heterogeneity Across Asset Classes

“…Various versions of the model, with varying numbers and types of agents, different profit and/or switching functions, and varying results, have been estimated successfully on a large number of asset classes. Especially stock markets (Boswijk et al, 2007;Hommes and in 't Veld, 2017;Chiarella et al, 2014;Lof, 2014) and foreign exchange markets (Frankel and Froot, 1990;De Jong et al, 2010;Spronk et al, 2013) have been extensively analyzed, but the model has also showed itself useful in explaining the price dynamics in, for instance, housing markets (Kouwenberg and Zwinkels, 2014;Bolt et al, 2014), option markets (Frijns et al, 2010), commodity markets (ter Ellen and Zwinkels, 2010;Baur and Glover, 2014;Westerhoff and Reitz, 2005), and credit markets (Chiarella et al, 2015). Even macro-economic variables such as inflation can be described by a heterogeneous agent model, as in Cornea-Madeira et al (2017) 1 .…”