The securitization of gold and its potential impact on gold stocks |
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| Affiliation: | 1. Department of Finance, National Central University, Taiwan, ROC;2. UQ Business School, University of Queensland, Brisbane, Australia;3. Guosen Securities Co., Ltd., China;1. Department of Economics, Mount Allison University, Canada;2. Rowe School of Business, Dalhousie University, Canada;1. Linköping University, Department of Management and Engineering, SE-581 83 Linköping, Sweden;2. IPAG Business School, France 184 Boulevard Saint-Germain, 75006 Paris, France;3. European University Institute, Department of Economics, Via della Piazzuola 43, I-50133 Florence, Italy;4. Rimini Centre for Economic Analysis (RCEA), Via Patara 3, 47900 Rimini, Italy |
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| Abstract: | We study the market impact of a very successful financial innovation – the SPDR Gold Trust exchange-traded fund (GLD). GLD holds physical gold, and provides traders with a convenient and cost-effective way to gain exposure to gold. We find that after the introduction of GLD, the liquidity of gold company stocks declined, and their adverse-selection risk increased. Over the two-month period after GLD’s introduction, the stocks’ relative effective bid-ask spreads increased by over 15%, while their adverse-selection cost, as measured by the price impact of trades, went up by more than 30%. Gold stocks also experienced significant negative abnormal returns (−12% on average) in the month after GLD started trading. Our findings suggest that GLD attracted traders, especially uninformed traders, away from gold company stocks, and that the resulting negative demand shocks and decrease in the stocks’ liquidity caused their prices to decline. Our results show that existing securities can be seriously adversely affected when a new security enters the market. |
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| Keywords: | Financial innovation Securitization Market impact Gold Exchange-traded funds |
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