How Does Investor Sentiment Shape the Liquidity Response to Monetary Policy Announcements in Precious Metal Markets?

30 Pages Posted: 3 Aug 2017

See all articles by Lee A. Smales

Lee A. Smales

University of Western Australia

Brian M. Lucey

Trinity Business School, Trinity College Dublin; Jiangxi University of Finance and Economics; Abu Dhabi University - College of Business Administration; Ho Chi Minh City University of Economics and Finance

Date Written: August 1, 2017

Abstract

In addition to a myriad of industrial uses, precious metals continue to play an important role in the global financial system; they are increasingly popular as an investment and form part of a well diversified portfolio in addition to acting as central bank reserves. Understanding how macro-economic events shape liquidity in this market is important for a number of market participants, and also helps policy makers assess the efficacy of the policy transmission mechanism. Using high-frequency data, we consider liquidity provision in the period around monetary policy announcements and relate this to prevailing levels of investor sentiment. We are able to contrast changes in liquidity in the gold and silver markets, and across three instruments (futures, ETFs, and physical/bullion). We show that liquidity is removed from the market around 5-minutes prior to the announcement and then reverts to normal within 10-minutes (gold market) and 16-minutes (silver market). The magnitude of the liquidity response is determined by both the scale of surprise in the FOMC announcement, and the prevailing level of investor sentiment. Both sentiment and monetary policy surprises have a greater impact on liquidity during periods of low sentiment.

Keywords: Monetary policy decisions, Liquidity, Investor Sentiment, Gold, Silver

JEL Classification: G1, G10, G14

Suggested Citation

Smales, Lee A. and Lucey, Brian M., How Does Investor Sentiment Shape the Liquidity Response to Monetary Policy Announcements in Precious Metal Markets? (August 1, 2017). Available at SSRN: https://ssrn.com/abstract=3011760

Lee A. Smales (Contact Author)

University of Western Australia ( email )

UWA Business School
35 Stirling Highway
Perth, Western Australia 6009
Australia

Brian M. Lucey

Trinity Business School, Trinity College Dublin ( email )

The Sutherland Centre, Level 6, Arts Building
Dublin 2
Ireland
+353 1 608 1552 (Phone)
+353 1 679 9503 (Fax)

Jiangxi University of Finance and Economics ( email )

South Lushan Road
Nanchang, Jiangxi 330013
China

Abu Dhabi University - College of Business Administration ( email )

PO Box 59911
Abu Dhabi, Abu Dhabi 59911
United Arab Emirates

Ho Chi Minh City University of Economics and Finance ( email )

59C Nguyen Dình Chieu
6th Ward, District 3
Ho Chi Minh City, Ho Chi Minh 70000
Vietnam

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