Gold priced in oil, economic fundamentals and return predictability
Abstract: Gold to oil prices ratio (GO) is a procyclical leading economic indicator, which reveals and enhances the information of gold prices related to economic fundamentals rather than financial risk or economic distress. We empirically show that GO positively predicts future excess stock market returns both in-sample and out-of-sample. GO performs better during economic recessions and bear market periods, and outperforms other gold price ratios. GO predicts stock returns by affecting future economic conditions and discount rates. GO provides us with a new perspective to explain gold price behaviors during economic recessions.
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