Complutense University Library

Risk Management of Precious Metals


Hammoudeh, Shawkat and Malik, Farooq and McAleer, Michael (2011) Risk Management of Precious Metals. [ Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE); nº 4, 2011, ] (Unpublished)

Creative Commons Attribution Non-commercial.


Official URL:


This paper examines volatility and correlation dynamics in price returns of gold, silver, platinum and palladium, and explores the corresponding risk management implications for market risk and hedging. Value-at-Risk (VaR) is used to analyze the downside market risk associated with investments in precious metals, and to design optimal risk management strategies. We compute the VaR for major precious metals using the calibrated RiskMetrics, different GARCH models, and the semi-parametric Filtered Historical Simulation approach. The best approach for estimating VaR based on conditional and unconditional statistical tests is documented. The economic importance of the results is highlighted by assessing the daily capital charges from the estimated VaRs.

Item Type:Working Paper or Technical Report
Additional Information:

JEL Classification: G1

Uncontrolled Keywords:Precious metals, Conditional volatility, Risk management, Value-at-risk.
Subjects:Social sciences > Economics > Finance
Social sciences > Economics > Econometrics
Series Name:Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE)
ID Code:12448

Basel Committee on Banking Supervision, (1988), International Convergence of Capital Measurement and Capital Standards, BIS, Basel, Switzerland.

Basel Committee on Banking Supervision, (1995), An Internal Model-Based Approach to Market Risk Capital Requirements, BIS, Basel, Switzerland.

Basel Committee on Banking Supervision, (1996), Supervisory Framework for the Use of “Backtesting” in Conjunction with the Internal Model-Based Approach to Market Risk Capital Requirements, BIS, Basel, Switzerland.

Batten, J.M. and B.M. Lucey (2010). Volatility in the gold futures market. Applied Economics Letters, 17(2), 187-190.

Barone-Adesi, G., K. Giannopoulos and L. Vosper (1999). VaR without correlations for portfolios of derivative securities. Journal of Futures Markets, 19, 583-602.

Barone-Adesi, G., K. Giannopoulos and L. Vosper (2002). Backtesting derivative portfolios with filtered historical simulation. European Financial Management, 8, 31-58.

Baur, D.G. and B.M. Lucey (2010). Is gold a hedge or a safe haven? An analysis of stocks, bonds and gold. The Financial Review, 45(2), 217-229.

Berkowitz, J. and J. O'Brien (2002). How accurate are value-at-risk models at commercial banks? Journal of Finance, 57(3), 1093-1111.

Bollerslev, T. (1986). Generalized Autoregressive Conditional Heteroskedasticity. Journal of Econometrics, 31: 307-327.

Brooks, C. and G. Persand (2003). Volatility forecasting for risk management. Journal of Forecasting, 22 (1), 1-22.

Cabedo, J.D. and I. Moya (2003). Estimating oil price „value at risk‟ using the historical simulation approach, Energy Economics, 25(3), 239-253.

Chng, M.T. (2009). Economic linkages across commodity futures: Hedging and trading implications. Journal of Banking and Finance, 33(5), 958-970.

Christoffersen, P. (1998). Evaluating interval forecasts. International Economic Review, 39(4), 841-862.

Christoffersen, P. (2003). Elements of Financial Risk Management, San Diego: Academic Press.

Christoffersen, P. (2009). Value-at-risk models. In T. Andersen, R. Davis, J.-P. Kreiss, and T. Mikosch (Eds.), Handbook of Financial Time Series. Springer Verlag.

Conover, C.M., G.R Jensen, R.R Johnson and J.M Mercer (2009). Can Precious Metals Make your Portfolio Shine? Journal of Investing, 18(1), 75-86.

Draper, P., R.W. Faff and D. Hillier (2006). Do precious metals shine? An investment perspective. Financial Analysts Journal, 62(2), 98-106.

Giot, P. and S. Laurent (2004). Modelling daily value-at-risk using realized volatility and ARCH type models. Journal of Empirical Finance, 11(3), 379-398.

Hammoudeh, S. and Y. Yuan (2008). Metal volatility in presence of oil and interest rate shocks. Energy Economics, 30(2), 606-620.

Hammoudeh, S., Y. Yuan, M. McAleer and M. Thompson (2010). Precious metals-exchange rate volatility transmissions and hedging Strategies. International Review of Economics and Finance (forthcoming).

Jensen, G.R., R.R. Johnson and J.M. Mercer (2002). Tactical asset allocation and commodity futures. Journal of Portfolio Management, 28(4), 100-111.

JP Morgan (1996). RiskMetrics, Technical Document, 4th Edition, New York.

Khalifa, A.A., H. Miao and S. Ramchander (2010). Return distributions and volatility forecasting in metal futures markets: Evidence from gold, silver, and copper. Journal of Futures Markets, forthcoming.

Kuester, K., S. Mittnik, and M. Paolella (2006). Value-at-risk prediction: A comparison of alternative strategies. Journal of Financial Econometrics, 4(1), 53-89.

Kupiec, P. (1995). Techniques for verifying the accuracy of risk measurement models. The Journal of Derivatives 3(2), 73-84.

McAleer, M. (2009). The ten commandments for optimizing value-at-risk and daily capital charges. Journal of Economic Surveys, 23(5), 831-848.

McAleer, M. and B. da Veiga (2008a). Forecasting value-at-risk with a parsimonious portfolio spillover GARCH (PS-GARCH) model. Journal of Forecasting, 27(1), 1-19.

McAleer, M. and B. da Veiga (2008b). Single index and portfolio models for forecasting value-at-risk thresholds. Journal of Forecasting, 27(3), 217-235.

McAleer, M., J.-A. Jimenez-Martin and T. Perez-Amaral (2009). The Ten Commandments for managing value-at-risk under the Basel II Accord. Journal of Economic Surveys, 23(5), 850-855.

McAleer, M., J.-A. Jimenez-Martin and T. Perez-Amaral (2010). A decision rule to minimize daily capital charges in forecasting value-at-risk. Journal of Forecasting, forthcoming.

Perignon, C., Z. Deng, and Z. Wang (2008). Do banks overstate their value-at-risk? Journal of Banking and Finance, 32(5), 783-794.

Perignon, C. and D. R. Smith. (2010). The level and quality of Value-at-Risk disclosure by commercial banks. Journal of Banking and Finance, 34(2) 2010, 362-377.

Sari, R., S. Hammoudeh and U. Soytas (2010). Dynamics of oil price, precious metal prices, and exchange rate. Energy Economics, 32(2), 351-362.

Deposited On:21 Mar 2011 12:18
Last Modified:06 Feb 2014 09:24

Repository Staff Only: item control page