Application of ARIMA and GARCH Models

to forecast the Gold Futures Prices

Dr. Nupur Hetamsaria
(ICFAI Business School, Hyderabad)
&

Mithun Maity
(Karvy Comtrade, Hyderabad)
NICR Workshop, October 10th 2007
October 10th 2007

Nupur Hetamsaria & Mithun Maity

Gold: An Investment Tool

Equities and Commodities

Gold forms 45% of total futures trading globally
An effective hedging tool
Higher liquidity than other real assets
Oil price impact on Gold
Resale value of Gold
Forecasting the future Gold prices

October 10th 2007

Nupur Hetamsaria & Mithun Maity

Data and Methodology

Daily prices from NYMEX and COMEX

14 years, appx. 3500 data points
ARIMA
GARCH

October 10th 2007

Nupur Hetamsaria & Mithun Maity

Price Graph of Gold Prices

800
700
600
500
400
300
200
500

1000

1500

2000

2500

GOLD

October 10th 2007

Nupur Hetamsaria & Mithun Maity

3000

Stationarity
ADF Test Statistic

0.313324 1% Critical Value*

-3.43532

PP Test Statistic

0.439737 1% Critical Value*

-3.4353

Gold Price series is not stationary.

First Difference of the price series.

October 10th 2007

Nupur Hetamsaria & Mithun Maity

Intercept

Trend
and
Intercept

Dickey Fuller Test

Philip Peron Test

ADF Test
Statistic

PP Test
Statistic

ADF Test
Statistic

ADF Test
Statistic

-23.863

-23.9215

-23.8299

None

October 10th 2007

1% Critical Value*

-3.4353

Akaike info criterion

Schwarz criterion

1% Critical Value*

-3.4353

5.482112

Akaike info criterion

5.485396

5.492703

Schwarz criterion

5.488923

1% Critical Value*

-3.9662

PP Test
Statistic

-60.86858

1% Critical Value*

-3.9662

Akaike info criterion

5.481955

Akaike info criterion

5.485005

Schwarz criterion

5.494311

Schwarz criterion

5.490296

1% Critical Value*

-2.5664

1% Critical Value*

-2.5664

Akaike info criterion

5.481968

Akaike info criterion

5.485379

Schwarz criterion

5.490794

Schwarz criterion

5.487142

PP Test
Statistic

-60.9116

-60.84753

Nupur Hetamsaria & Mithun Maity

40

20

-20

-40

-60
500

1000

1500

2000

2500

DGOLD

October 10th 2007

Nupur Hetamsaria & Mithun Maity

3000

Normality
Mean

0.086144

Median

Skewness

-0.74033

Kurtosis

18.11785

Jarque Barra

33582.55

Probability

Kurtosis high, indicating a fat tail distribution or a leptokurtic

distribution.

October 10th 2007

Nupur Hetamsaria & Mithun Maity

Correlogram
Variable

Coefficient

Std. Error

t-Statistic

Prob.

AR(1)

0.621301

0.056157

11.06371

AR(3)

-0.134398

0.032265

-4.165387

AR(6)

0.207676

0.061152

3.396052

0.0007

AR(11)

0.397422

0.049314

8.058982

AR(17)

-0.116156

0.055514

-2.09239

0.0365

AR(21)

-0.249367

0.024521

-10.16953

AR(28)

-0.050772

0.015572

-3.260515

0.0011

MA(1)

-0.641257

0.05479

-11.70385

MA(3)

0.174463

0.03261

5.350072

MA(6)

-0.245322

0.056933

-4.308968

MA(11)

-0.435156

0.046657

-9.326747

MA(17)

0.171075

0.058323

2.933233

0.0034

MA(21)

0.236852

0.023383

10.12933

October 10th 2007

Nupur Hetamsaria & Mithun Maity

0.10
0.05
0.00
0.10
-0.05
0.05
-0.10
0.00
-0.05
-0.10
500

1000

1500

Residual

October 10th 2007

2000

2500

Actual

Nupur Hetamsaria & Mithun Maity

3000
Fitted

Heteroscedasticity
ARCH Test:
F-statistic

74.38698

Probability

Obs*R-squared

72.86433

Probability

October 10th 2007

Nupur Hetamsaria & Mithun Maity

GARCH: Mean equation

GARCH(1,1)

Mean Equation
Coefficient

Std. Error

z-Statistic

Prob.

AR(6)

-0.03903

0.018965

-2.05778

0.0396

AR(12)

-0.04492

0.018417

-2.43881

0.0147

AR(45)

-0.04522

0.017644

-2.56266

0.0104

AR(79)

0.049338

0.01843

2.677098

0.0074

AR(89)

-0.03371

0.017259

-1.95314

0.0508

October 10th 2007

Nupur Hetamsaria & Mithun Maity

GARCH (1,1)
Variance Equation

9.54E-08

9.48E-08

1.00621

0.3143

ARCH(1)

0.04162

0.01339

3.10826

0.0019

GARCH(1)

0.960488

0.012698

75.64137

October 10th 2007

Nupur Hetamsaria & Mithun Maity

ARCH Test:
F-statistic

1.513348

Probability

0.218712

Obs*R-squared

1.513561

Probability

0.218597

October 10th 2007

Nupur Hetamsaria & Mithun Maity

Performance of In sample forecast

Root Mean Squared Error

7.622201

Theil Inequality Coefficient

0.006179

Bias proportion

0.000069

Variance proportion

0.000121

covariance proportion

0.99981

October 10th 2007

Nupur Hetamsaria & Mithun Maity

Performance of out of sample forecast

660

640

620

600

580

560
3400 3410 3420 3430 3440 3450 3460 3470 3480 3490
GOLD
October 10th 2007

GOLDFS

Nupur Hetamsaria & Mithun Maity