The Macroeconomic Determinants of Volatility in Precious Metals Markets

be considered among the choices for investment by both households and institutions.
Since silver has significant industrial uses, as mentioned by Erb and Harvey (2006)
among several others, its use for these purposes may not be so clear cut. Thus, our
empirical study will also provide useful evidence on the substitutability of gold and
silver, as suggested by their historical use as coinage, or whether they occupy separate
markets with different uses and functions, as has been suggested in the recent finance
literature (eg. Ciner, 2000; Erb and Harvey, 2006).

The remainder of the paper is organized as follows. Next, a brief review of the key
literature is undertaken; then, the statistical method and data used in the analysis is
discussed. The key findings are then discussed in section 4, while the final section (5)
provides some concluding remarks.

2. Related Literature

Commodities are important economically since fluctuations in their prices tend to impact
on the viability of production and investment decisions made by firms. In this sense, they
clearly impact upon the general level of economic activity (Bernard et al. 2006) as well as
having a key role in the formation of inflationary expectations. For financial researchers,
commodities are also of interest for their potential role in asset allocation decisions. In
this regard, recent papers by Abanomey and Mathur (2001), Georgiev (2001), Nijman
and Swinkels (2003) and Chan and Young (2006) argue that commodities provide risk
reduction in portfolios along with stocks and bonds. Similarly, Edwards and Caglayan
(2001) show that commodity funds provide higher returns when stocks perform poorly,

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