Abstract
This paper provides strong evidence of time-varying return predictability of three precious metals from January 1987 to September 2014. We use three variations of the variance ratio test, the nonlinear Brock, Dechert and Schieinkman test as well as the Hurst exponent to evaluate the time-varying return predictability of precious metals to reduce the risk of spurious results. Our full sample results report mixed findings where some tests indicate significant predictability while some suggest no predictability. However through a time-varying procedure, we show that each precious metal market goes through periods of significant predictability as well as periods of unpredictability. Therefore this finding suggests that return predictability does vary over time and is not a static, all-or-nothing condition and therefore is consistent with the adaptive market hypothesis. We also show that platinum is the most predictable of the three precious metals and silver the least predictable, which may be of great to investors who include precious metals in their investment portfolios.
Disclosure Statement
No potential conflict of interest was reported by the authors.
Notes
1. For an excellent review of the literature on gold (see O’Connor et al. Citation2015).
2. Linear and nonlinear predictability.
3. Which has often been ignored in the literature.
4. For examples of contrasting results from different variance ratio tests (see for example, Smith Citation2012; Niemczak and Smith Citation2013; Urquhart Citation2014).
5. Similar to Hull and McGroarty (Citation2014).
6. Charles, Darné, and Kim (Citation2015) use the automatic variance ratio test while this paper uses the Chow–Denning, joint-rank and joint-sign variance ratio tests.