Does gold–platinum price ratio predict stock returns? International evidence

Abstract

PurposeThe purpose of this study is to investigate the relationship between gold–platinum price ratio (GP) and stock returns in international stock markets. The study addresses three empirical questions: (1) Does GP have robust predictive power in international stock markets? (2) Does GP outperform other macroeconomic variables in international stock markets? (3) What is the relationship between GP and stock market returns during economic recessions?Design/methodology/approachThe study mainly uses OLS regressions to perform empirical tests for a comprehensive set of 17 advanced international stock markets and overall world market. The monthly data is used for the period January 1978 to July 2019, 499 observations for each market.FindingsThe study finds that the first-difference of GP (ΔGP), not the initial-level of GP, has strong predictive power for stock returns, both in short- and long-time horizons. The results remain robust after controlling for a number of macroeconomic predictors. The out-of-sample test results are significant, confirming the robustness of the predictive power of ΔGP.Originality/valueThis study is the first to examine the ability of the ΔGP to predict stock returns, and provide novel evidence on the relationship between ΔGP and international stock markets. The study draws on behavioral finance theory, specifically the myopic loss aversion, the herd effect and the limited attention theory, to explain the predictability of stock returns in international stock markets.

The Effect of COVID-19, Commodity Prices, and Exchange Rate on Indonesian Stock Market

“…Next, the results of this study differ from those of Nugroho and Robiyanto (2021) and Xu et al (2022) which states that there is a negative relationship between the stock market and gold prices. Considering that the research period is 2 years, the test results prove that the long-term relationship between changes in gold prices and stock market performance during the pandemic is positive.…”

“…However, it has a negative impact on the stock markets of Mexico, Malaysia, Thailand, Chile and Indonesia. Xu, Li. Singh (2022) proves that changes in gold prices have a significant negative correlation with returns in most stock markets.…”