Rational Bubbles in the Price of Gold [report]

Behzad Diba, Herschel Grossman
1984 unpublished
This paper describes a theoretical and empirical study of the possibility of rational bubbles in the relative price of gold. The critical implication of the theoretical analysis is that, if rational bubbles exist, the time series of the relative price of gold, as well as any time series obtained by differencing a finite number of times, is nonstationary. The empirical evidence relating to this nonstationarity property involves diagnostic checks for stationarity carried out in both the time
more » ... both the time domain and the frequency domain. This evidence strongly suggests that the process generating the first difference of the log of the relative price of gold is stationary, a finding that is inconsistent with the existence of rational bubbles. More broadly, the empirical analysis finds a •close correspondence between the time series properties of the relative price of gold and the time series properties of real interest rates, which the theory relates to the time series properties of the fundamental component of the relative price of gold. In sum, the evidence is consistent with the combined conclusion that the relative price of gold corresponds to market fundamentals, that the process generating first differences of market fundamentals is stationary, and that actual price movements do not involve rational bubbles.
doi:10.3386/w1300 fatcat:c5d4hb2sqbeana7zcg5jvbod3a