Wednesday, March 02, 2005

SSRN-Psychological Barriers in Gold Prices? by Raj Aggarwal, Brian Lucey

The momentum for behavioral finance continues with a look at the importance of barrier prices in the Gold Market.

SSRN-Psychological Barriers in Gold Prices? by Raj Aggarwal, Brian Lucey

Aggarwal and Lucey "[present] evidence of psychological barriers in gold prices. [They] document that prices in round numbers act as barriers with important effects on the conditional mean and variance of the gold price series around psychological barriers."

At the risk of making some authors (who claim that these barriers are merely equilibrium outcomes) upset, the actual price of a security should not matter. For instance why is 10,000 any different than 10,040; the price should move through each with the same ease. However, most practioners claim that this is not the case.

In Aggarwal and Lucey's words:
"If gold markets are rational and efficient, we should not expect to see any psychological price barriers. However, significant numbers of commentators attribute particular levels of the gold bullion price as being ‘barriers’ or ‘support levels’ or in some other manner as being intrinsically more ‘important’ than other price levels."
Existing research has largely focused on equities and have found that there is some empirical existence for such psychological barriers.
"(see (R. G. Donaldson & Kim, 1993), (R. Glen Donaldson, 1990a, 1990b)) a variety of equity markets (not, however the Nikkei or the Wiltshire indices) are shown to deviate from this [uniform distribution] assumption"
Looking at the gold market by using both tests of uniformity and looking for barrier prices, Aggrawal and Lucey find:
"psychological barriers at the 100’s digits (price levels such as $200, $300 etc) do exist in daily gold prices....We find some significant evidence of changes in conditional
means around psychological barriers. However, we document very strong evidence of changes in the variances of returns in the vicinity of and when crossing psychological price barriers in gold markets.
VERY INTERESTING!

Suggested Citation
Aggarwal, Raj and Lucey, Brian M., "Psychological Barriers in Gold Prices?" (January 2005). Institute for International Integration Studies Discussion Paper No. 53. http://ssrn.com/abstract=669761

1 comment:

Yasser said...

Chartists - long derided by academics! - could have told you the above over 75 years ago.