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Parities and Spread Trading in Gold and Silver Markets: A Fractional Cointegration Analysis

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  • Shi-Miin Liu
  • Chih-Hsien Chou

Abstract

This article tries to disclose true parity relationships between gold and silver prices using fractional cointegration analysis. Both gold-silver and silver-gold parities are slow-adjustment long-memory processes with a time-varying risk premium. Information exposed by the parities is extremely useful in relatively long-run spread trading in the precious metal markets. Significant riskless profits could be earned based on the general ECMs' forecasting of the changes of the futures and cash spreads between gold and silver. The performance problem of gold and silver markets as a whole, therefore, is obvious.

Suggested Citation

  • Shi-Miin Liu & Chih-Hsien Chou, 2003. "Parities and Spread Trading in Gold and Silver Markets: A Fractional Cointegration Analysis," Applied Financial Economics, Taylor & Francis Journals, vol. 13(12), pages 899-911.
    • Handle: RePEc:taf:apfiec:v:13:y:2003:i:12:p:899-911
    DOI: 10.1080/0960310032000129626
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    Cited by:

    1. Mishra, Bibhuti Ranjan & Pradhan, Ashis Kumar & Tiwari, Aviral Kumar & Shahbaz, Muhammad, 2019. "The dynamic causality between gold and silver prices in India: Evidence using time-varying and non-linear approaches," Resources Policy, Elsevier, vol. 62(C), pages 66-76.
    2. Derek Bond & Michael J. Harrison & Edward J. O'Brien, 2005. "Testing for Long Memory and Nonlinear Time Series: A Demand for Money Study," Trinity Economics Papers tep20021, Trinity College Dublin, Department of Economics.
    3. Brian Lucey & Edel Tully, 2006. "Seasonality, risk and return in daily COMEX gold and silver data 1982-2002," Applied Financial Economics, Taylor & Francis Journals, vol. 16(4), pages 319-333.
    4. Dirk Baur & Duy Tran, 2014. "The long-run relationship of gold and silver and the influence of bubbles and financial crises," Empirical Economics, Springer, vol. 47(4), pages 1525-1541, December.
    5. Krauss, Christopher, 2015. "Statistical arbitrage pairs trading strategies: Review and outlook," FAU Discussion Papers in Economics 09/2015, Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics.
    6. Pierdzioch, Christian & Risse, Marian & Rohloff, Sebastian, 2015. "Cointegration of the prices of gold and silver: RALS-based evidence," Finance Research Letters, Elsevier, vol. 15(C), pages 133-137.
    7. O'Connor, Fergal A. & Lucey, Brian M. & Batten, Jonathan A. & Baur, Dirk G., 2015. "The financial economics of gold — A survey," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 186-205.
    8. Tiwari, Aviral Kumar & Dutta, Subhendu & Dash, Aruna Kumar, 2017. "Testing of the Seasonal Unit Root Hypothesis in the Price Indices of Agricultural Commodities in India," Asian Journal of Agriculture and Development, Southeast Asian Regional Center for Graduate Study and Research in Agriculture (SEARCA), vol. 14(2), December.
    9. Vigne, Samuel A. & Lucey, Brian M. & O’Connor, Fergal A. & Yarovaya, Larisa, 2017. "The financial economics of white precious metals — A survey," International Review of Financial Analysis, Elsevier, vol. 52(C), pages 292-308.
    10. Derek Bond & Michael J. Harrison & Edward J. O'Brien, 2007. "Demand for Money: A Study in Testing Time Series for Long Memory and Nonlinearity," The Economic and Social Review, Economic and Social Studies, vol. 38(1), pages 1-24.
    11. A. Khalifa & S. Hammoudeh & E. Otranto & S. Ramchander, 2012. "Volatility Transmission across Currency, Commodity and Equity Markets under Multi-Chain Regime Switching: Implications for Hedging and Portfolio Allocation," Working Paper CRENoS 201214, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    12. Zouheir Ahmed Mighri & Majid Ibrahim Al Saggaf, 2018. "Gold - Silver Nexus: A Threshold Cointegration Approach," International Journal of Economics and Financial Issues, Econjournals, vol. 8(5), pages 210-219.
    13. Fernando Caneo & Werner Kristjanpoller, 2021. "Improving statistical arbitrage investment strategy: Evidence from Latin American stock markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 4424-4440, July.

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