LEAD LAG RELATIONSHIP BETWEEN GOLD FUTURES AND SPOT PRICES

1
LEAD LAG RELATIONSHIP BETWEEN GOLD FUTURES AND
SPOT PRICES

• PRESENTED
• BY
• DR. D.LAZAR
• READER
• DEPARTMENT OF COMMERCE
• SCHOOL OF MANAGEMENT
• PONDICHERRY UNIVERSIY
• PONDICHERRY 605014
• EMAIL dlazar.com_at_pondiuni.edu.in

2
Derivatives and Futures

• Derivatives are financial security such as an
  option
• or future whose value is derived in part from
  the
• value and characteristics of another security,
  the
• underlying asset.
• Future contracts is an agreement made and traded
  on
• the exchange between two parties to buy or sell
  a
• commodity at a particular time in the future
  for a pre-
• defined price

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Advantages and Disadvantages

• The producer realizes the greatest return with
  this
• marketing alternative.
• No premium charge is associated with futures
• market contracts.
• Subject to margin calls
• Unable to take advantage of favourable price
  moves
• Net price is subject to Basis change

4
World Gold Markets

• London as the great clearing house
• New York as the home of futures trading
• Zurich as a physical turntable
• Istanbul, Dubai, Singapore and Hong Kong as
  doorways to important consuming regions.
• Tokyo where TOCOM sets the mood of Japan
• Mumbai under India's liberalized gold regime

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India in World Gold Industry
(Rounded Figures) India (In Tons) World (In Tons) Share
Total Stocks 13000 145000 9
Central Bank holding 400 28000 1.4
Annual Production 2 2600 0.08
Annual Recycling 100-300 1100-1200 13
Annual Demand 800 3700 22
Annual Imports 600
Annual Exports 60
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Indian Gold Market

• Gold is valued in India as a savings and
  investment vehicle and is the second preferred
  investment after bank deposits.
• In July 1997 the RBI authorized the commercial
  banks to import gold for sale or loan to
  jewellers and exporters.
• The gold hoarding tendency is well ingrained in
  Indian society.
• In the cities gold is facing competition from the
  stock market and a wide range of consumer goods.
• Facilities for refining, assaying, making them
  into standard bars in India, are insignificant,
  both qualitatively and quantitatively.

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GOLD

• A very ductile and malleable, brilliant yellow
  precious metal that is resistant to air and water
  corrosion.
• In the cities gold is facing competition from
  the stock market and a wide range of consumer
  goods.
• In rural areas it is a preferred and secured
  Investment.
• Last few years the prices of gold has soured to
  high and never showed the declining path.
• It is generally accepted and believed by every
  one that it is due to prices in derivative
  markets that the spot market prices have gone up.
• It is also, understood and widely believed by
  every one in the Gold market is that the prices
  will never come down below Rs.800 per gram.
• This condition has made the researchers to look
  into the price behaviour of Gold in India with if
  possible to compare it with other countries

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Review of Literature

• Future and Spot Market of Financial Assets
• Ser-Huang Poon and Clive W.J.Granger(2003)
• Kalok Chan, K.C.Chan and Andrew Karolyi (1991)
• Antonios Antonion and Ion Garett (1993)
• Hendrik Beesembinder and Paul C.Seguin (1992)
• Hans R.Stoll and Robert E.Walley (1990)
• Ira G.Kawaller, Paul D.Koch and Timothy
  W.Koch(1987)
• Hun Y.Park (1991)
• Susan J. Crain and Jae Ha Lee (1996)

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Review of Literature.. Cont

• Future and Spot Market of Commodities
• Kenneth D.Garbade and William L.Silber (1982)
• Marcus J.Chambers and Roy E.Bailey (1996)
• Weike Hai, Nelson C.Mark and Yangru Wu (1997)
• James E.Martin
• M.D.Feminow
• Robert W.Golb, Roger A.Morin and Gerald D.Gay
  (1983)
• Masahiro Kawai (1983)
• John Spiriggs, Micheal Keylen and David
  Bessler(1982)
• Aris Propopadakis and Hans R.Stoll (1983)
• Hector O.Zapata and T.Randall Fortenbery (1996)

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Review of Literature.. Conclusion

• All the papers examining the price discovery role
  and lead lag relationship between futures and
  spot prces have to a large extent followed the
  most common tool to test for
• Co-integration, conditioned on the
  existence of
• a long run relationship and
• single equation error correction models have
• been specified in order to draw inference about
  
• causality

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Review of Literature.. Conclusion

• Single Equation Error Correction Model is only
  valid given an exogeneity assumption and
• Bivariate specifications cannot in general
  capture all the relevant information when there
  are several contract with different time to
  expiration.
• The form of long run relationship between the
  future and spot prices and particularly if basis
  is constant so that the prices mover
  proportionately to each other (Most cases it is
  assumed)

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In the present study.

• This research paper is going to use multivariate
  framework like the Johansen test to overcome the
  drawback highlighted above.
• The approach will be used to study futures on
  Gold. Price leadership in the futures market for
  Gold as well as spot market .
• Very few rather only study is available on Gold
  price out the literature reviewed.

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Period of Study

• Due to its recent spurt in the market recent
  three years period daily price is to be
  considered in the study.

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Chapter Organization

• First unit will have Introduction
• Standard theory on spot-future price
  relationship is to be presented in Unit two.
• Multivariate empirical specifications will be
  in unit three
• Fourth unit would contain data used in the
  study
• Fifth unit would present the result and
  concluding remarks.