Thursday, August 21, 2014

Risk Analysis for Three Precious Metals

Qinlu (Louisa) Chen and I have recently completed a paper titled, "Risk Analysis for Three Precious Metals: An Application of Extreme Value Theory". It's based in part on work that Louisa undertook in her B.Sc. Honours program here at UVic.

Here's the abstract:
"Gold, and other precious metals, are among the oldest and most widely held commodities used as a hedge against the risk of disruptions in financial markets. The prices of such metals fluctuate substantially, introducing a risk of its own. This paper’s goal is to analyze the risk of investment in gold, silver, and platinum by applying Extreme Value Theory to historical daily data for changes in their prices. The risk measures adopted in this paper are Value at Risk and Expected Shortfall. Estimates of these measures are obtained by fitting the Generalized Pareto Distribution, using the Peaks‐Over‐Threshold method, to the extreme daily price changes. The robustness of the results to changes in the sample period is discussed. Our results show that silver is the most risky metal among the three considered. For negative daily returns, platinum is riskier than gold; while the converse is true for positive returns."
If you're interested, you can download the full paper here.

© 2014, David E. Giles