Modelling the volatility of the global gold price by applying the ARCH/GARCH models

Abstract

The purpose of this article is to analyse the trend of global gold price yields and volatility with the aim of making effective financial decisions about investments in this precious metal, by applying and comparing the results of ARCH and GARCH competing models, using the lowest values of the chosen information criteria. ARCH and GARCH models are intended for the time series' analysis, with the observed instability of the conditional variance. Gold usually has the function of a safe haven, also serving as a warrantor of monetary stability, especially in times of crisis. On the example of 1,151 daily observations on the gold global price and yield rates, the E-GARCH model was applied, the results of which suggest investors to be cautious in their decision-making since the impact of negative shocks (losses) on yield volatility has a strong long-memory effect, making this investments highly risky, especially in bad economic circumstances.