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IIMB Management Review

Journal of Indian Institute of Management Bangalore

IIM Bangalore offers Degree-Granting Programmes, a Diploma Programme, Certificate Programmes and Executive Education Programmes and specialised courses in areas such as entrepreneurship and public policy.

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About IIMB

The Indian Institute of Management Bangalore (IIMB) believes in building leaders through holistic, transformative and innovative education

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PRICE FORMATION IN INDIAN GOLD MARKET: ANALYSING THE ROLE OF GOLD EXCHANGE TRADED FUNDS (ETFS) AGAINST SPOT AND FUTURES MARKETS

Gold exchange traded funds (ETFs) and gold futures represent two such segments that enable investors to gain exposure to the price movement of gold in a manner similar to that of stocks traded at the exchange. With different segments of the market tracking the same asset class, the present study attempts to investigate the relative efficiency of one market over the other i.e., between spot price of physical gold and gold ETFs, as well as between gold ETFs and gold futures in the Indian context which accounts for one of the largest consumers of the metal in the world. Using various econometric techniques such as cointegration, vector error correction model (VECM), Gregory-Hansen (1996) statistics and Toda-Yamamoto test of causality, the results reveal that gold ETFs, when compared to their spot and futures counterparts, are relatively inefficient. ETF prices are found to lag both the spot as well as futures prices. Limited participation, limited awareness, illiquidity and absence of margin trading are found to be the prime reasons explaining the relative inefficiency of gold ETFs. The study also provides for the caution that needs to be exercised while interpreting the results for linear cointegration which may fail to detect the existence of long-run relationship between the variables in the presence of the structural break inherent in the data series.