Climate risks and predictability of the trading volume of gold: Evidence from an INGARCH model

• DOI: 10.1016/j.resourpol.2023.103438
• Publication Date: 2023-03-13T10:45:38Z
• Authors: Sayar Karmakar; Rangan Gupta; Oguzhan Cepni; Lavinia Rognone
• Keywords: 13. Climate action; Precious metals; INGARCH; 0502 economics and business; 05 social sciences; Trading volumes; Climate risks; Forecasting; Count data

We investigate whether text-based physical or transition climate risks forecast the daily volume of gold trade contracts. Given the count-valued nature of gold volume data, we employ a log-linear Poisson integer-valued generalized autoregressive conditional heteroskedasticity (IN-GARCH) model with a climate-related covariate. We detect that physical risks have a significant predictive power for gold volume at 5- and 22-day-ahead horizons. Additionally, from a full-sample analysis, it emerges that physical risks positively relate with gold volume. Combining these findings, we conclude that gold hedges physical risks at 1-week and 1-month horizons. Similar results hold for platinum and palladium, but not for silver.