My grandfather once burst out with an allegoric advice to his grandchildren. He said “anything that is not used will die”. He expatiated this by saying that “anything that is not constantly nor periodically used nor oiled, begins to deteriorate and experience eventual demise”. He asked us to think wild about everything that could be included under the ambits of his statement. He allowed us to think about machines, parts of which rust and eventually stop working if not used. He likened it even to the human body, that sedentary lifestyle could make a young person look old and eventually develop unhealthy semblance which could lead to an early death. So, he encouraged us to have healthy and athletic lifestyle. He even compared his philosophy with the mind, that the mind that is not constantly stimulated will eventually become weak. Such a weak mind will not be able to contribute to the invention of anything new and so could easily be considered dead. For this reason, he challenged us to pursue academic adventures and have the mind always stimulated.
I took this advice to the bone. So, over the years, I have consciously challenged myself with one Professional Development Short course or another. After a while, I decided to take a bigger bite and went in for a second Master of Science Degree in Industrial Finance and Investment, a field I had no background knowledge in. It was challenging at the beginning, obviously because I was coming from a purely science background. But I drew strength from my grandfather’s allegory, by looking at it as a challenge that was stimulating my intellectual and mental faculties, which was eventually making my mind healthier and better.
Regardless the challenges which affected my overall GPA, my final dissertation received encouraging commendations from the faculty. My supervisor was so impressed and we just submitted a paper from it. Because of my background in the extractives, I decided to look at the Dialectic Relationship Between Exchange Rate Volatility and Gold Price. Permit me to give you a sneak peak of our work.
Our interest was in the unpredictable nature of exchange rate volatility, and we also wanted to know whether the said exchange rate volatility had any relationship or influence on the price of gold on the world market. It was purely exploratory, so we analyzed high frequency time series data of 5057 days of the exchange rates of three currencies (GBP, EURO, AUD), and we bench marked to the price of gold in US Dollar from 2000 to 2020. We first subjected the data to multiple regression analyses at level. To determine the correlations between the variables we engaged the Augmented Dicky Fuller test, which served as a guide to establish integration factors for differencing.
Subsequently, we tested four Generalized Auto-Regressive Conditional Heteroskedasticity (GARCH (p, q)) models over three error distribution methods. We also developed novel indices which helped us to measure Degrees of Parsimony and Dominance Preference Differences. We used these two new indices to choose t-GARCH (1,1) as the best model for our data set. We further used Threshold GARCH (1,1) to capture the inherent positive and negative shocks in the volatility of exchange rate and the price of gold. We also used correlograms of the squared residuals, as well as histogram normality tests and ARCH LM effect for our model diagnostic tests. After doing all these, we were able to eventually forecast the data for the last 5 years successfully i.e., from 2015 to 2020.
In the final analysis, our results suggest dialectically that, the price of gold today as we have it on the market, depends on the previous price of the commodity, and also depends significantly on the variability or volatility of the selected exchange rates. Most interestingly however, our findings also suggest that the price of gold depends significantly on the previous exchange rate of especially the EURO. We noticed surreptitiously that a positive shock has a 6% effect on the volatility of our variables than a negative shock. We think traders in forex, especially in gold should particularly consider the exchange rate of the EURO for futures purchases of the yellow metal.
From the study, we predict the price of gold to remain volatile but between $1,204 and $1,993.70 till January 2022. This prediction has seen some truth and correlations till now, making our model more robust than we had imagined it to be even in the advent of Covid-19.
But did you realize you just read my abstract from my paper at Press at the Journal of Empirical Finance, Elsevier?
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