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| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | Intraday Price Anomalies in the Gold and Silver Market: A Profitable Trading Strategy? |
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| Institution | University of Zurich |
| Faculty | Faculty of Economics, Business Administration and Information Technology |
| Number of Pages | 71 |
| Date | 2014 |
| Abstract Text | Executive Summary The thesis analyses intraday price behavior of the gold and silver market to identify consistent abnormal price movements. As a first step, the current academic literature is reviewed regarding price anomalies, other seasonality effects and other research in the field of the precious metals markets. Furthermore, the market characteristics of both metals are examined regarding its supply and demand structure. Besides the many qualitative similarities of both metals, there are many differences in quantitative terms. For instance, each metal is heavily used for jewelry as well as a financial asset, although the physically traded volumes in terms of USD are much larger in the gold market. The main part of the thesis is about detecting intraday price anomalies. Therefore, different time dimension combinations compared with each other. The first time dimension concerns the investigated total period from 10.09.2007 to 31.01.2014. This timeframe is further divided into three market phases, which are characterized by a positive, neutral and negative price trend. The second time dimension focuses on the time window of 24 hours to detect intraday price trends. The examined data points are the half-hourly updated gold and silver prices. This second dimension is further divided into regional exchange trading hours such as London, New York, Hong Kong and others. Finally, the last time dimension explores the single weekdays. In a first part, the descriptive statistical key figures of the half-hourly returns are analyzed. Moreover, the returns are tested for normality and additionally non-parametric inferential statistical methods are applied. The results indicate mostly non-normal distributed returns but also similarities between certain regional trading hours. Based upon the conducted tests the results suggests that a single trading day can be divided into two parts, which are distinct regarding various key figures such as the return mean and its distributional characteristic. Additionally the gold mean returns around the gold AM- and PM-fixing show the highest negative values of the whole trading day for all defined market scenarios. In the negative market environment, the silver mean is the highest around the silver-fixing time. The most distinct result regarding the division of the trading day into two parts shows the time between the opening trading hours in London until the gold PM-fix in comparison to the remaining hours until the next opening in London. Based upon these findings, possible trading strategies are defined for each market. A buy and hold investment in the corresponding underlying serves as a benchmark. In a first step, the cost structures of the strategies are evaluated and it is evident, that the implementation costs are the major issue. Due to higher spreads and lower liquidity in the silver market, the assumed costs are significantly higher than for all gold strategies. Although the return figures before costs consideration were much better, it changed greatly after including costs to the back testing. The best performing strategy for both markets is a short position during the Londoner opening until the PM-fix and subsequently change it to a long position until the next Londoner opening and repeat it for every day. This strategy yields a considerable positive excessive return to a simple buy and hold investment in every defined market period for both metals. Alternatively, a long-only - 2 - strategy in gold for the just mentioned long position timeframe also yields a very attractive return, which goes along with the lowest volatility and maximum drawdown values of all tested strategies. This is due to lower implementation costs and the avoidance of any exposure during the more volatile Londoner trading hours. Altogether, the price behavior is much more consistent across the different defined market environments and allows such a simple rule based investment strategy. Despite this, the intraday prices in the silver market behave much less stable and consequently such simple rule based strategies as explained above entail more risk and a more sophisticated risk management is required. |
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