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Forecasting Stock-Market Tail Risk and Connectedness in Advanced Economies Over a Century: The Role of Gold-to-Silver and Gold-to-Platinum Price Ratios

Author

Listed:
  • Afees A. Salisu

    (Centre for Econometric & Allied Research, University of Ibadan, Ibadan, Nigeria; Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa)

  • Christian Pierdzioch

    (Department of Economics, Helmut Schmidt University, Holstenhofweg 85, P.O.B. 700822, 22008 Hamburg, Germany)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa)

  • David Gabauer

    (Data Analysis Systems, Software Competence Center Hagenberg, Hagenberg, Austria)

Abstract
We examine the predictive value of risk perceptions as measured in terms of the gold-to-silver and gold-to-platinum price ratios for stock-market tail risks and their connectedness in eight major industrialized economies using monthly data for the period 1916:02-2020:10 and 1968:01-2020:10, where we use four variants of the popular Conditional Autoregressive Value at Risk (CAViaR) framework to estimate the tail risks for both 1% and 5% VaRs. Our findings for the short sample period show that the gold-to-silver price ratio resembles the gold-to-platinum price ratios in that it is a useful proxy for global risk. Our findings for the long sample period show, despite some heterogeneity across economies, that the gold-to-silver price ratio often helps to out-of-sample forecast for both 1% and 5% stock market tail risks, particularly when a forecaster suffers a higher loss from underestimation of tail risks than from a corresponding overestimation of the same absolute size. We also find that using the gold-to-silver price ratio for forecasting the total connectedness of stock markets is beneficial for an investor who suffers a higher loss from an underestimation of total connectedness (i.e., an investor who otherwise would overestimate the benefits from portfolio diversification) than from a comparable overestimation.

Suggested Citation

  • Afees A. Salisu & Christian Pierdzioch & Rangan Gupta & David Gabauer, 2021. "Forecasting Stock-Market Tail Risk and Connectedness in Advanced Economies Over a Century: The Role of Gold-to-Silver and Gold-to-Platinum Price Ratios," Working Papers 202161, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:202161
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    4. Riza Demirer & David Gabauer & Rangan Gupta & Joshua Nielsen, 2023. "Gold-to-Platinum Price Ratio and the Predictability of Bubbles in Financial Markets," Working Papers 202317, University of Pretoria, Department of Economics.
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    7. Choi, Insu & Kim, Woo Chang, 2023. "Estimating Historical Downside Risks of Global Financial Market Indices via Inflation Rate-Adjusted Dependence Graphs," Research in International Business and Finance, Elsevier, vol. 66(C).

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    More about this item

    Keywords

    Stock markets; Tail risks; Connectedness; Gold-to-silver price ratio; Gold-to-platinum price ratio; Forecasting; Asymmetric loss;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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