Time-Varying Risk Aversion and Realized Gold Volatility

We study the incremental in- and out-of-sample predictive value of time-varying risk aversion for realized volatility of gold-price returns via extended heterogeneous autoregressive realized volatility (HAR-RV) models. Our findings suggest that time varying risk aversion possesses predictive value for gold volatility both in- and out-of-sample. The predictive power of risk aversion is robust to the inclusion of realized higher-moments, jumps, gold returns, leverage effect as well as the aggregate market volatility in the forecasting model. Interestingly, risk aversion is found to absorb in sample the predictive power of stock-market volatility at a short forecasting horizon, while out-of-sample results show that risk aversion adds to predictive value at a medium and long forecast horizon. Additional tests suggest that the short-run (long-run) out-of-sample predictive value of risk aversion is beneficial for investors who are more concerned about over-predicting (under-predicting) gold market volatility. Overall, our findings show that time-varying risk aversion captures information useful for predicting (bad, good) realized volatility not already contained in the other predictors, and allows more accurate out-of-sample forecasts to be computed at a medium and long forecast horizon.