Analysis of Chinese gold market : dependence and interaction with multiple financial indexes

Abstract

Gold is widely regarded as a safe asset and is no one’s liability. Because of the unique status of gold among all financial assets, gold markets always catch the research interests of scholars. China has the largest gold production and consume volume and the second largest exchange-traded gold market in the world. Studying China’s gold market is of great significance, but only limited research focused on China’s gold market. Information spreads instantly in today’s financial systems and financial markets are interconnected with each other. Understanding the connections and relationship among different markets is vital for financial practitioners and regulators. To this end, this thesis aims to enrich the research about China’s gold market by focusing on its dependence and interaction with other financial markets. Four studies are performed from different perspectives. Firstly, this thesis investigates the interdependence between onshore and offshore RMB based gold price with GARCH-copula models, extends the offshore RMB related research to gold markets. Secondly, the dependence structure between China’s and international gold price is studied, and the influence of liberalization policies on China’s gold market is considered. Thirdly, although high dependence exists between China’s and international gold prices, the price gap is still volatile. From the perspectives of fundamentals, global contagion and financial shocks, this thesis explores the factors that influence the price gap. Finally, the diversification functions of gold in China for RMB exchange rate and stock index are studied. A novel framework consisting of quantile regression and wavelet analysis is proposed to carry out the research. Several conclusions can be drawn from the works above. Firstly, the Student-t copula is proved to be the best among several widely-used copula models to fit the dependence structure between onshore and offshore RMB gold markets. Considering the two RMB gold markets, the market with higher gold price will lead to the rising of gold price in the other market when gold price is in an upturn. Secondly, Chinese gold market and international gold market highly co-move with each other, even during the 2008 Financial Crisis. Evidences also show that the launching of the International Board in Shanghai Gold Exchange makes the dependence of the two gold markets closer. Thirdly, for the factors that impact the price gap, the strength of quote currency is identified as the key factor driving the price gap. Unexpectedly, liberalization policies do not show significant influence on the price gap. At last, it is found that RMB quoted gold is generally a hedge and a safe haven in the immediate aftermath of extreme market shocks for CNY/USD exchange rate and Chinese stock index. The contributions of this thesis can be summarized as follows. This research provides an in-depth understanding of the relationship between China’s gold market and international gold market. It also sheds lights on the influence of the liberalization policies on China’s gold market. Furthermore, it presents a reference for studying the relationship between financial markets.