Time Disparity and Price Discovery: The Effect of the U.S. Futures on Korean Gold Market
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We examine price efficiency of the Korea Exchange (KRX) gold market by showing price discovery factors in the market. This study put forward a hypothesis that the price change of the gold futures in the CME (Chicago Mercantile Exchange) would have a positive impact on the rate of return of the KRX gold market. In addition, this paper goes into detail about the international gold price having a negative correlation with the value of the United States (US) dollar. To test the goal of the research, both the rate of return of the CME gold futures at t-1 days and ICE (Intercontinental Exchange) dollar index futures at t-1 days are investigated to determine whether they have an impact on the market rate of return in the KRX gold market at t day using regression analysis and GARCH model in order to look closely at the factors that determine the market price of the KRX gold market. As results, we find following evidences. First, the rate of return of the CME gold futures at t-1 days has a positive significant impact on the market rate of return in the KRX gold market at t day. Second, the rate of return of ICE dollar index futures at t-1 day could not be confirmed to significantly determine the market rate of return in the KRX gold market at t day. We also investigate the effect of the NYSE United States 5-year bond yield and CBOE VIX futures on the KRX close-to-open rate of return in the KRX gold market and find significant impact of the VIX futures on KRX gold market price. To the extent that the futures market has a characteristic of leading the spot market, this study supports the view of a link between time disparity and price discovery in Korea and the U.S. financial market.
Abstract
We examine price efficiency of the Korea Exchange (KRX) gold market by showing price discovery factors in the market. This study put forward a hypothesis that the price change of the gold futures in the CME (Chicago Mercantile Exchange) would have a positive impact on the rate of return of the KRX gold market. In addition, this paper goes into detail about the international gold price having a negative correlation with the value of the United States (US) dollar. To test the goal of the research, both the rate of return of the CME gold futures at t-1 days and ICE (Intercontinental Exchange) dollar index futures at t-1 days are investigated to determine whether they have an impact on the market rate of return in the KRX gold market at t day using regression analysis and GARCH model in order to look closely at the factors that determine the market price of the KRX gold market. As results, we find following evidences. First, the rate of return of the CME gold futures at t-1 days has a positive significant impact on the market rate of return in the KRX gold market at t day. Second, the rate of return of ICE dollar index futures at t-1 day could not be confirmed to significantly determine the market rate of return in the KRX gold market at t day. We also investigate the effect of the NYSE United States 5-year bond yield and CBOE VIX futures on the KRX close-to-open rate of return in the KRX gold market and find significant impact of the VIX futures on KRX gold market price. To the extent that the futures market has a characteristic of leading the spot market, this study supports the view of a link between time disparity and price discovery in Korea and the U.S. financial market.
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