Forecasting Gold Futures Volatility In China:A Comparison Of The Information Content Between China And U.S.gold Future And Option Markets

Volatility forecasting plays a key role in asset pricing,asset allocation,risk management and policy making.Gold markets in China have experienced rapid growth.With the continuous expansion of gold market,it becomes a heated topic to better forecast the realized volatility of gold futures.Taking the daily realized volatility(RV)of China gold futures as dependent variable,the volatility of China and U.S.gold markets,including future markets and option markets,as independent variable,this paper compares the information content of different markets in the forecast using simple AR model and HAR model.Firstly,examine forecast performances for pre-and post-night trading period.Then decompose the gold volatility into day and night trading parts and compare the forecasting power of them.Secondly,construct GVZ of China then compare its predictive power to U.S.GVZ.Thirdly,compare the information content of future and option markets to evaluate whether option markets contain forecasting information independently.Finally,construct investment strategies to evaluate main variables’ economic value.The study finds that: Firstly,for pre-night trading period,the information involved in China gold futures RV dominates that in U.S.in the case of the predictive power,while the reverse applies and the long-term information performs better for post-night trading period.Besides,the predictive information is mainly contained in day-time in China and night-time in U.S..Decompose RV into several parts can enhances the predictive performance.Secondly,when it comes to GVZ,China’s short-term information has stronger predictive power than that in U.S.,while the reverse applies for medium and long-term.Thirdly,both China and U.S.option markets contain information independent of futures,but less than the latter.From the perspective of asset allocation,variables used in this paper can help to capture profit.Overall,it’s important to consider the information in both China and U.S.markets as well as future and option markets when forecasting China gold futures RV.And futures RV should be decomposed.The variables used in this paper also show considerable economic value.The main innovations of this paper are:Firstly,this paper distinguishes day and night trading of China and U.S.gold futures,and compares the forecasting power of them.Secondly,China’s GVZ is constructed and compared with U.S.GVZ.Thirdly,the economic value of each factor in this paper is evaluated.