IDEAS home Printed from https://ideas.repec.org/a/ebl/ecbull/eb-07f30020.html
   My bibliography  Save this article

Nonlinear Mean Reversion and Arbitrage in the Gold Futures Market

Author

Listed:
  • Jeng-Bau Lin

    (Department of Business Administration, National Chung-Hsing University)

  • Jin-Ming Liang

    (Department of Information Management, Hsing Kuo University of Management)

  • Chin-Chia Liang

    (Department of Business Administration, National Chung-Hsing University)

Abstract

Previous literatures take transaction costs as being negligible when analyzing the futures basis behavior in linear dynamic framework. However, we argue that the relationship between the futures and spot prices with the conventional linear cointegration approach may not be appropriate after taking transaction costs into account. In this paper, an incorporation of transaction costs presented by Dumas (1992) and Michael (1997) into the exponential smooth transition autoregressive (ESTAR) model developed by Granger and Terasvita (1993) is motivated to examine the dynamic relationship between daily gold futures and spot prices and the nonlinear behavior of the gold futures basis. Transaction costs may lead to the existence of neutral band for futures market speculation within which profitable trading opportunities are impossible. Further, our results indicate that the ESTAR model provides higher forecasting power than the linear AR(1) model.

Suggested Citation

  • Jeng-Bau Lin & Jin-Ming Liang & Chin-Chia Liang, 2008. "Nonlinear Mean Reversion and Arbitrage in the Gold Futures Market," Economics Bulletin, AccessEcon, vol. 6(9), pages 1-11.
    • Handle: RePEc:ebl:ecbull:eb-07f30020
    as

    Download full text from publisher

    File URL: http://www.accessecon.com/pubs/EB/2008/Volume6/EB-07F30020A.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages 119-136, Suppl. De.
    2. Chen, Show-Lin & Wu, Jyh-Lin, 2000. "A Re-Examination of Purchasing Power Parity in Japan and Taiwan," Journal of Macroeconomics, Elsevier, vol. 22(2), pages 271-284, April.
    3. Garbade, Kenneth D & Silber, William L, 1983. "Price Movements and Price Discovery in Futures and Cash Markets," The Review of Economics and Statistics, MIT Press, vol. 65(2), pages 289-297, May.
    4. Michael, Panos & Nobay, A Robert & Peel, David A, 1997. "Transactions Costs and Nonlinear Adjustment in Real Exchange Rates: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 862-879, August.
    5. Kawaller, Ira G & Koch, Paul D & Koch, Timothy W, 1987. "The Temporal Price Relationship between S&P 500 Futures and the S and P 500 Index," Journal of Finance, American Finance Association, vol. 42(5), pages 1309-1329, December.
    6. Chan, Kalok, 1992. "A Further Analysis of the Lead-Lag Relationship between the Cash Market and Stock Index Futures Market," The Review of Financial Studies, Society for Financial Studies, vol. 5(1), pages 123-152.
    7. Dumas, Bernard, 1992. "Dynamic Equilibrium and the Real Exchange Rate in a Spatially Separated World," The Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 153-180.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jin-Ray Lu & Chih-Ming Chan, 2014. "Optimal portfolio choice of gold assets in the differential market and differential game structures," Review of Quantitative Finance and Accounting, Springer, vol. 42(2), pages 309-325, February.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:ebl:ecbull:v:6:y:2008:i:9:p:1-11 is not listed on IDEAS
    2. Tse, Yiuman, 2001. "Index arbitrage with heterogeneous investors: A smooth transition error correction analysis," Journal of Banking & Finance, Elsevier, vol. 25(10), pages 1829-1855, October.
    3. Param Silvapulle & Titi Kanti Lestari & Jae Kim, 2004. "Nonlinear Modelling of Purchasing Power Parity in Indonesia," Econometric Society 2004 Australasian Meetings 316, Econometric Society.
    4. Uctum, Remzi, 2007. "Économétrie des modèles à changement de régimes : un essai de synthèse," L'Actualité Economique, Société Canadienne de Science Economique, vol. 83(4), pages 447-482, décembre.
    5. Fredj Jawadi & Catherine Bruneau & Nadia Sghaier, 2009. "Nonlinear Cointegration Relationships Between Non‐Life Insurance Premiums and Financial Markets," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(3), pages 753-783, September.
    6. Milas Costas & Legrenzi Gabriella, 2006. "Non-linear Real Exchange Rate Effects in the UK Labour Market," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 10(1), pages 1-34, March.
    7. Li, Dandan & Ghoshray, Atanu & Morley, Bruce, 2013. "An empirical study of nonlinear adjustment in the UIP model using a smooth transition regression model," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 109-120.
    8. Q.Farooq Akram & Øyvind Eitrheim & Lucio Sarno, 2006. "Non-linear Dynamics in Output, Real Exchange Rates and Real Money Balances: Norway, 1830-2003," Contributions to Economic Analysis, in: Nonlinear Time Series Analysis of Business Cycles, pages 333-377, Emerald Group Publishing Limited.
    9. Valerie Mignon & Gilles Dufrenot & Slim Chaouachi, 2004. "Modelling the misalignments of the Dollar-Sterling real exchange rate: A nonlinear cointegration perspective," Economics Bulletin, AccessEcon, vol. 3(19), pages 1-11.
    10. Mubariz Hasanov, 2009. "A note on efficiency of Australian and New Zealand stock markets," Applied Economics, Taylor & Francis Journals, vol. 41(2), pages 269-273.
    11. Jing Hao & Xiong Xiong & Feng He & Feng Ma, 2019. "Price Discovery in the Chinese Stock Index Futures Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 55(13), pages 2982-2996, October.
    12. repec:ebl:ecbull:v:6:y:2003:i:2:p:1-11 is not listed on IDEAS
    13. Béreau, Sophie & Villavicencio, Antonia López & Mignon, Valérie, 2010. "Nonlinear adjustment of the real exchange rate towards its equilibrium value: A panel smooth transition error correction modelling," Economic Modelling, Elsevier, vol. 27(1), pages 404-416, January.
    14. Sarantis, Nicholas, 1999. "Modeling non-linearities in real effective exchange rates," Journal of International Money and Finance, Elsevier, vol. 18(1), pages 27-45, January.
    15. Philip Shively, 2003. "Threshold stationary real exchange rates: a nonlinear, multivariate approach," Economics Bulletin, AccessEcon, vol. 6(2), pages 1-11.
    16. Shuxin Guo, 2021. "Do futures lead the index under stress? Evidence from the 2015 Chinese market turmoil and its aftermath," Review of Quantitative Finance and Accounting, Springer, vol. 56(1), pages 91-110, January.
    17. Holmes, Mark J. & Maghrebi, Nabil, 2004. "Asian real interest rates, nonlinear dynamics, and international parity," International Review of Economics & Finance, Elsevier, vol. 13(4), pages 387-405.
    18. Tswei, Keshin & Lai, Jing-yi, 2009. "Information contents misjudged: Digressive convergence to equilibrium in cointegrated prices," Review of Financial Economics, Elsevier, vol. 18(4), pages 183-189, October.
    19. López Villavicencio, Antonia, 2008. "Nonlinearities or outliers in real exchange rates?," Economic Modelling, Elsevier, vol. 25(4), pages 714-730, July.
    20. Kempf, Alexander & Korn, Olaf, 1995. "Der Einfluß von Arbitrageuren auf die Preisführerschaft von Finanzmärkten," ZEW Discussion Papers 95-02, ZEW - Leibniz Centre for European Economic Research.
    21. Pradhan, Rudra P. & Hall, John H. & du Toit, Elda, 2021. "The lead–lag relationship between spot and futures prices: Empirical evidence from the Indian commodity market," Resources Policy, Elsevier, vol. 70(C).
    22. Umair Khalil & Alamgir & Amjad Ali & Dost Muhammad Khan & Sajjad Ahmad Khan & Zardad Khan, 2016. "Unit Root Testing and Estimation in Nonlinear ESTAR Models with Normal and Non-Normal Errors," PLOS ONE, Public Library of Science, vol. 11(11), pages 1-11, November.

    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ebl:ecbull:eb-07f30020. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: John P. Conley (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.