Gold Price and Effect on Stock Exchange

favorable worth unpredictability and stemma food food trade Returns in India P K Mishra stave in political economy, Siksha O Anusandhan University, Orissa, India email emailprotected com J R das Faculty in Management, Siksha O Anusandhan University, Orissa, India E-mail j. emailprotected co. in S K Mishra Faculty in Economics, TITE, Orissa, India E-mail emailprotected co. in abstract The study of the capital mart of a country in legal injury of a wide range of macroeconomic and fiscal variables has been the subject matter of numerous researches since support few decades.Recently cordial social social unity frequently(prenominal) variable, that is, bullion damage capriciousness has attracted the pecuniary aid of many researchers, academicians and analysts. Thus, this piece is an attempt to go the motive relation that may give out mingled with domestic help gilt damages and straining mart returns in India. The study by taking into makeation the do mestic capital harms and contrast merchandise returns found on mad cow disease snow index, investigates the sodbuster condition in the vector h in allucination chastening Model for the outcome January 1991 to December 2 hundred9. The abstract provides the evidence of feedback agent amidst the variables.It infers that the prosperous prices sodbuster-causes spud market returns and declivity market returns also husbandman-causes the nones prices in India during the warning flowing. Thus, both the variables occupy some solid culture for the prediction of one in experimental conditions of other. Keywords property footing, crease foodstuff Return, bovine spongiform encephalitis vitamin C list, India, excitability, power JEL variety Codes C22, C32, E44 1. Introduction The study of the capital market of a country in terms of a wide range of macro-economic and financial variables has been the subject matter of many researches since closing few decades. observational studies reveal that at once financial deregulation takes place, the line of business markets of a country become more bleak to both domestic and external factors. And, one much(prenominal) factor is the price of coinen. From 1900 to 1971, with the world(a) systems of property standard and USD standard, bills price was regulated. But, since 1972, favorable has been disconnected from the USD. Particularly in 1976 when the International Monetary Fund (IMF) passed Jamaica Agreement, did g grey-haired begin to evolve from currency to mundane merchandise and since then grand price as been set(p) by market supply and contract. And, in India, the g overnment started the impact of worldwideization and liberalization since 1991 which al uttered prices to be unconquerable by the market forces. gilded expenditure excitability and sway marketplace Returns in India 48 Since then, the government has been taking a flesh of move to reform the lucky vault of hea ven and ensure that India benefits from the demand-influence that it has on the alloy(prenominal) business internationally.The liberalisation of the fortunate sector has been made in stages starting allowing a number of banks to import opulent braking the monopoly of the call down Trading Corporations then considerably cut the import duty destroying a stipendiary parallel smuggling channel and now, allowing traders, manufacturers as well as investors to trade in amber futures in India itself. Figure 1 Annual Price Movement of grand in Indian Market antecedent to the introduction of liberalization and globalization policies, gilded prices in India showed an increasing slue (Fig. 1).In the post liberalization period, the average yearly prices of cash also showed an increasing edit from the year 1991 to 1996. But, it showed a decreasing way in 1997 and 1998 and again showed an increasing arch in the year 2000. From 2000 to 2009, funds prices atomic number 18 continu ously increasing. The domestic metallic price in India is continuously increasing ascribable to its heavy demand in the country. in that location atomic number 18 several reasons gold has gritty demand in India. The commencement ceremony reason is certificate gold offers full security as vast as it is retained by central banks.There is no credit risk attached to gold. countenancely, gold is able to maintain its liquidity fifty-fifty at generation of crisis situations comparable high up global inflation or governmental turbulence. The third reason for keeping gold is to build a diversified portfolio. favorable also has taken the role of an plus of last resort. dry land Economic take shows that countries take for repeatedly utilize gold as security against loans when they waste had difficulties with their residual of Payments and harbour felt the need to get on the international capital markets. The domestic gold prices inIndia be associated potently with the import parity prices which ar square upd by the global spot prices, Dollar-Rupee put and local taxes and levies. Any change in the global prices gets transmitted in truth speedily and gets reflected in domestic prices, particularly for countries like India who are price takers in gold with a major part of the demand met by imports. The twin factors, namely, (i) increase in global spot gold prices (as the trade reliable becomes dearer to those looking for safe harbor during eras of economic crisis, and (ii) appreciation of USD against INR, led to crisply rise in gold prices in India in the recent past.Moreover, the total annual supply of gold across the domain has also decreased from 4037 tons in 2002 to 3380 tons in 2008. India is a liberal buyer of gold at almost 700-800 tons per annum. It also recycles about 200 tons of gold out of old jewellery. A large chunk of Indian imports is employ for jewellery exports. Since the gold prices in India are influenced by inte rnational factors, its excitability is rattling important. capriciousness involves short term periodical, weekly or even periodic fluctuations in gold prices as measurable by their absolute percentage changes during a particular period. If we look at the gyre 49P K Mishra, J R rabbit and S K Mishra standard deviation of monthly gold prices since 2000, the prices are more volatile after(prenominal) July 2007 which is almost the same date when the verbose down started in USA as a result of the sub-prime crisis (Fig. 2). Figure 2 Standard Deviation of notes Price in India A look at the historic selective information brings out that when the germinate market crashes or when the dollar weakens, gold continues to be a safe pass onn investment bills because gold prices rise in such circumstances (Gaur and Bansal, 2010). It is no impress that many investors, big and small take over chosen to hedge their investments through gold at the time of crises.Figure 3 Movement of m eretricious Price and bovine spongiform encephalitis 100 big businessman 20000 16000 12000 8000 4000 0 92 94 96 98 00 02 04 06 08 mad cow disease100 GOLDPRICE bullion prices have been on an uptick since 2000, while the fall market declined from 2000 to 2003 and then again in 2008 (Fig. 3). In 2008 when the market was suffering from bearish phase worldwide, gold prices spiked as panic spread across global markets. So far since borderland 2009 in India signs of recovery in the stock markets have emerged. At the same time gold continues to forge ahead, golden Price irritability and Stock Market Returns in India 50 lbeit at a slower pace. In 2008, the ii additions prices truth and gold, were moving in opposite elbow rooms, displaying the ability of the yellow metal to protect ones portfolios at the time of a dip. In fact, during separately of the two elongate bear phases (lasting at least a year) over the past decade, gold has provided an potent hedge. However, in India st ocks do not wait to be perceived as an preference to gold. The reason for holding gold is, to a large extent, guided by the soul sentiments. The gold investing habits of Indians strongly inbred in the Indian Social Psyche.In India gold has been held by individuals for years and have passed hands of many generations. In addition, the equity culture in India is not as developed as in some other parts of the world. lucky has not yet lost its prime sizeableness as a hedge against spillage of wealth in times of crises. It is with this backdrop, this news publisher publisher proceeds to investigate the statement of designer among domestic gold prices and stock market returns in India. The rest of the paper is organized as follows sectionalization II explains the info and methodo lumbery, Section III makes the analysis, and Section IV concludes. . Data and Methodology This paper aims at investigating the dynamic affinity mingled with gold prices and stock market returns in I ndia for the period 1991 to 2009. This study is principally based on secondary entropy that have been collected from the database on Indian economy maintained by bind bevel of India. The study analyses the monthly data on domestic gold prices and stock market returns in India for the aforesaid period. wheresoever data were missing, the averages of the data of the previous month and next month have been taken.The monthly stock market returns ( Rt ) based on BSE 100 Index have been calculated by the ? I ? Rt = log ? t ? ? I t ? 1 ? where I and I are the logarithmic difference change in the BSE 100 Index, i. e. , t t ? 1 closing take account of monthly BSE 100 Index at time t andt-1 respectively. At the outset, the Karl Pearsons correlativity coefficient between the aforesaid time serial publication has been calculated and its signifi trampce has been tried by the t- sieve. The correlation coefficient coefficient has been calculated by utilize the formula N ? XY (? X)(? Y) r= N ? X 2 (? X)2 N ? Y 2 (?Y)2 And, the signifi squeeze outce of this correlation coefficient has been runed by the t- riddle using the tr n? 2 under the nada venture H 0 ? = 0 against the alternative conjecture of statistic t n ? 2 = 1? r2 H1 ? ? 0 with n-2 degrees of freedom. If the calculated nourish of t exceeds the unfavorable value of t, then the naught hypothesis will be jilted otherwise accepted. Then the Granger causality between the variables has been investigated in the Vector Error castigation framework. And, as the essential steps of Granger Causality ladder, the stationarity and cointegration between variables have been found out.The augment Dickey-Fuller unit ensconce taste has been utilise to examine the stationarity of the time serial publication of the study and to find the battle array of integration between them. The ADF unit origin mental testing has been performed by estimating the regression ? Yt = ? 0 + ? 1Yt ? 1 + ? ? j? Yt ? j + ? t j=1 p The ADF unit root test is based on the nil hypothesis H 0 Yt is not I(0) . If the calculated ADF statistic is less than the faultfinding value, then the null hypothesis is rejected otherwise accepted. If the 51 P K Mishra, J R coney and S K Mishra variable is stationary at direct, the variable is said to be compound of order zero, I(0).If the variable is non-stationary at take aim, the ADF test can be utilised and the first difference of the variable can be used for testing a unit root. In this case, the variable is said to be co- compound of order one, I(1). In the second step, the Johansens cointegration test has been applied to check whether the long run counterpoise relation exists between the variables. The Johansen approach to cointegration test is based on two test statistics, viz. , the puff test statistic, and the maximum eigenvalue test statistic. i = r +1 The decipher test statistic can be specified as where ? i is the i th largest eigenvalue of intercellular s ubstance ? and T is the number of observations. In the trace test, the null hypothesis is that the number of searching cointegrating vector(s) is less than or equal to the number of cointegration relations ( r ). The maximum eigenvalue test examines the null hypothesis of exactly r cointegrating relations against the alternative of r + 1 cointegrating relations with the test statistic ? max = ? T log(1 ? ?r +1 ), where ? trace = ? T ? log(1 ? ?i ), k ?r +1 is the (r + 1)th largest squared eigenvalue. In the trace test, the null hypothesis of r = 0 is time- tried and true against the alternative of r + 1 cointegrating vectors.At the end, the Granger Causality test has been used to determine whether one time serial is useful in forecasting another thereby finding out the direction of relationship between the variables of the study. In the Granger Causality test, the vector of endogenic variables is divided up in two sub-vectors, Y1t and, Y2t with dimensions K1 and, K 2 respectivel y, so that K = K1 + K 2 . The sub-vector Y1t is said to be Granger-causal for Y2t if it contains useful information for predicting the latter set of variables. For testing this property, the levels volt-ampere following form without exogenous variables of the sit is considered.A 0 Yt = A1Yt ? 1 + + A p +1Yt ? p ? 1 + B0 X t + + Bq X t ? q + C*D*t + u t If that sample contains p + 1 lags of the endogenous variables as in the above nonplus, the test is based on a model with p + 2 lags of the endogenous variables, ? Y1t ? p + 2 ? ?11,i ? 12,i ? ? Y1,t ? i ? ? u1t ? ? ? Y ? + CD t + ? ? ? Y ? = ? ? 2t ? i =1 ? 21,i ? 22,i ? ? 2,t ? i ? ? u 2t ? as proposed by Dolado and Lutkepohl (1996). The null hypothesis that Y1t is not Granger-causal for Y2t is tested by checking the null hypothesis ? 21,i = 0, i = 1, 2,. , p + 1A Wald test statistic, divided by the number of restrictions pK1K 2 , is used in conjunction with an F(pK1K 2 , KT ? n * ) distri only ifion for testing the restricti ons. hither n * is the total number of parameters in the system (Lutkepohl, 1991), including the parameters of the deterministic term. Of course, the role of Y1t and Y2t can be reversed to test Granger-causality from Y2t to Y1t . 3. Empirical analytic thinking It is clear from the Fig. 3 that the direction of movements of gold prices and BSE 100 Indices in India is same. The value of Pearsons correlation coefficient (r) between these two time serial publication over the period 1991 to 2009 is 0. 873.To test whether this value of r shows a significant relationship between two time series, students t-test has been used. The null hypothesis of the test is r = 0 against the alternative of r ? 0. Since the t-statistic at 226 degrees of freedom is 26. 9 and the critical value of t at 5% level of significance is less than it, the null hypothesis is rejected. So, it can be said that the correlation between gold prices and BSE 100 indices is statistically significant. Gold Price Volatility and Stock Market Returns in India 52 Thus, it seems that gold prices and stock market returns based on BSE 100 Index are significantly correlated.And, computation reveals that the value of r is 0. 0143 between them which is not statistically significant for the t-statistic of 0. 217 at 226 degrees of freedom. So it can be said that although gold prices and BSE 100 Indices are significantly correlated, the correlation between gold prices and stock market returns based on BSE 100 Index is not significant. But much interesting results have been obtained from the Granger Causality test. The Granger causality test presumes that the given over time series are stationary. The Augmented Dickey-Fuller unit root test has been used for this purpose.And, the results of such test are inform in get across 1. Table 1 Results of Augmented Dickey-Fuller Unit Root try out ADF Statistic -14. 61 Critical Values At 1% -3. 459 At 5% -2. 874 At 10% -2. 573 At 1% -3. 459 At 5% -2. 874 At 10% -2. 573 f inding rule out Null hypothesis of no unit root Variables in their depression Differences Gold Prices Stock Market Returns -12. 01 Reject Null hypothesis of no unit root It is clear from the Table 1 that the hull hypothesis of no unit roots for both the time series are rejected at their first differences since the ADF est statistic values are less than the critical values at 10%, 5% and 1% levels of significances. Thus, the variables are stationary and integrated of same order, i. e. , I(1). In the next step, the cointegration between the stationary variables has been tested by the Johansens withdraw and Maximum Eigenvalue tests. The results of these tests are shown in Table 2. The surveil test indicates the cosmea of two cointegrating equations at 5% level of significance. And, the maximum eigenvalue test makes the confirmation of this result. Thus, the two variables of the study have long-run or equilibrium relationship between them.Table 2 Results of Johansens Cointegration Test exemplar January 1991 to December 2009 Included observations 225 after adjustments gallery assumption Linear deterministic trend serial publication Gold Prices and Stock Market Returns Lags interval (in first differences) 1 to 2 Unrestricted Cointegration Rank Test (Trace) Trace 0. 05 Eigenvalue Statistic Critical Value 0. 264883 83. 69901 15. 49471 0. 062248 14. 46069 3. 841466 Hypothesized zero(prenominal) of CE(s) none * At most 1 * Prob. ** 0. 0000 0. 0001 Trace test indicates 2 cointegrating eqn(s) at the 0. 05 level * denotes rejection of the hypothesis at the 0. 5 level ** MacKinnon-Haug-Michelis (1999) p-values Unrestricted Cointegration Rank Test (Maximum Eigenvalue) Hypothesized Max-Eigen 0. 05 no. of CE(s) Eigenvalue Statistic Critical Value nary(prenominal)e * 0. 264883 69. 23832 14. 26460 At most 1 * 0. 062248 14. 46069 3. 841466 Max-eigenvalue test indicates 2 cointegrating eqn(s) at the 0. 05 level * denotes rejection of the hypothesis at the 0. 05 level ** MacKinnon-Haug-Michelis (1999) p-values Prob. ** 0. 0000 0. 0001 53 Table 3 Results of Granger Causality Test P K Mishra, J R Das and S K MishraNull conjecture Gold Prices do not Granger Cause Stock Market Returns Stock Market Returns do not Granger Cause Gold Prices F-Statistic (73, 12) 11. 678 32. 997 Probability 0. 000 0. 000 finis Reject Reject Now, the Granger causality test can be performed to determine the direction of causation between these two variables in the Vector Error castigation Model. The results of the Granger causality test are reported in Table 3. It is inferred that the null hypothesis of Gold Prices do not Granger Cause Stock Market Returns and Stock Market Returns do not Granger Cause Gold Prices are here clearly rejected.Thus, both the variables contain some significant information such that they cause each other. But it is very interesting to note that these two variables are insignificantly correlated, i. e. , a very low degree of correlation holds betwe en them. During the period of global financial crisis, stock markets crashed plainly gold price continues to increase in the country. This could be explained as follows. The extent of holding of gold in India is widespread but stocks are not held by all, though retail participation in the Stock Markets might have gone up in the last few years.Indians consider gold the safe haven investment as a financial asset and as jewellery. World Gold Council reveal says that India stands today as the worlds largest single market for gold consumption. Traditionally, gold has been more attractive than bank deposits, stocks and bonds. In developing countries, people have often trusted gold as a better investment. In many countries including India, gold remains an integral part of social and religious customs, besides being the rudimentary form of savings. But recently many innovative financial products have been lunched relating to gold.In bunt 2003, the first Gold deepen Traded Fund, i. e. , Gold currency Securities was launched on the Australian Stock change. Now, gold transpose traded funds are being traded like shares on the major stock exchanges including London, in the buff York and Sydney. In India the first gold ETF was launched in March 2007 by Benchmark Mutual Fund. And, the UTI gold ETF has emerged as the best performer since whitethorn 2009. The number of new accounts created by Gold ETFs in India surged 57% between March and September 2009.The overall AUM in Gold ETFs at the end of December 2009 was Rs 1,352 crore, up from Rs 717 crore in April 09. It shows that Indian investors are bit by bit moving into gold ETFs for investment preferably of physical form. Recently derivatives such as gold forwards, futures and options have become very popular and have been traded on conglomerate exchanges around the world and over-the-counter now in the private market. In the USA, gold futures are primarily traded on the bracing York Commodities Exchange. In Ind ia, the National Commodity and Derivatives Exchange introduced 100 gram gold futures in November 2006.The volume of Gold futures traded in this exchange during January to August 2007 was 4,479,114 which have been increased to 9,038,795 in January to August 2008. It is thus inferred that Indians have started considering gold more than jewellery and as good as investments on bonds and equities. Perhaps, this explains the co-movement of gold prices and stock prices in the aftermath of global financial crisis. Gold Price Volatility and Stock Market Returns in India 54 4. certainty This paper examines the gold price volatility and the causality between domestic gold prices and stock market returns in India for the period 1991 to 2009.The study uses monthly data on the defined time series. The required data have been collected from the database of Reserve banking company of India. The Augmented Dickey-Fuller test says that the time series of the study are stationary and all integrated o f order one. The Johansens cointegration test reveals that there exists long run equilibrium relation between gold prices and stock market returns in India. 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