The international business cycle and gold-price fluctuations

Fluctuations of the real exchange rate, real interest rates, and the dynamics of the price of gold in a small open economy

“…In earlier literature, several authors have found that the gold market is informationally efficient with respect to the predictor variables being focused on in the various empirical studies (Tschoegl, 1980;Solt and Swanson, 1981;Ho, 1985;Pierdzioch et al, 2014aPierdzioch et al, , 2014b. A positive economic value-added, when measured in terms of a forecaster's loss function and the out-of-sample relative loss criterion, is not necessarily inconsistent with market efficiency because our behavioral-finance approach does not measure the economic value-added of forecasts in terms of excess profits derived from using forecasts to set up a trading rule.…”

“…We use the behavioral-finance approach recently proposed by Pierdzioch et al (2014b) to assess the economic value-added of forecasts. The starting point of their behavioral-finance approach is an asymmetric loss function of the type studied by Elliott et al (2005Elliott et al ( , 2008.…”

“…We use data for Australia, a small open economy, to study the predictive power of the rate of change of the real exchange rate and G6 real interest rates for the rate of change of the price of gold. 1 Second, like Pierdzioch et al (2014aPierdzioch et al ( , 2014b, we use the real-time forecasting approach developed by Timmermann (1995, 2000) to study whether real interest rates and the rate of change of the real exchange rate help to predict out-of-sample the rate of change of the price of gold. The real-time forecasting approach is a natural choice for studying the 1 Interest rates for Japan are available only from 2002 onwards from the datasource that we use.…”

“…Results of significant recent research, however, show that invoking symmetry of the loss function may be too restrictive (Elliott et al, 2005;Mamatzakis, 2008, 2013;Fritsche et al, 2014; among others). Pierdzioch et al (2014b), using a loss function studied by Elliott et al (2005Elliott et al ( , 2008, show how a behavioral-finance approach can be applied to evaluate outof-sample forecasts under an asymmetric loss function. Their criterion nests an out-of-sample forecasting criterion recently advocated by Campbell and Thompson (2008) in the case that the loss function is assumed to be symmetric.…”

“…Their criterion nests an out-of-sample forecasting criterion recently advocated by Campbell and Thompson (2008) in the case that the loss function is assumed to be symmetric. We apply the behavioral-finance approach proposed by Pierdzioch et al (2014b) to study the predictive power of real interest rates and the rate of change of the real exchange rate for the rate of change of the real price of gold under both a symmetric and an asymmetric loss function.…”