that existing theoretical and empirical relationships evident in key macreoeconomic
factors that are known to drive stock markets (Chen, 1991; Kearney, 2000; Racine, 2001;
Flannery and Protopapadakis, 2002), should also be present and impact upon the
volatility structure of this relatively homogeneous subset of commodities, if one could
speak of commodities as a single asset class. We include in our empirical analysis
macroeconomic factors that are known to be important for these metals, considering their
economic and industrial uses (Abanomey and Mathur, 2001; Ciner, 2001; Erb and
Harvey, 2006; Fleming et al. 2006).
Our study also offers several additional contributions. First, although there is significant
prior work on the macroeconomic determinants of volatility in equity markets, little
evidence exists from other non-financial markets. If similar factors are important in all or
at least other asset markets, it could be argued that they should figure in arbitrage based
asset pricing models. While to the best of our knowledge this is the first paper to provide
empirical evidence on this issue in commodity markets, it usefully extends Ross (1989),
who argues that since volatility is a proxy for information flow, focusing on the volatility
structure rather than returns, provides additional and valuable insights into portfolio and
price dynamics.
Second, our focus on precious metals permits us to analyze the nature of the arbitrage and
price relationship between the gold and silver markets, which have also been discussed in
prior work. For instance, it is frequently argued, especially by practitioners, that since
gold behaves like surrogate money it provides a hedge against inflation and hence, should