“Risk Premia in Gold Lease Rates” by Haoxiang Zhu
MIT Sloan School of Management
University of North Carolina at Chapel Hill
Gold is an important global reserve asset, widely held by the official sector and private investors. In this paper, we study a measure of the opportunity costs of holding gold, the gold lease rates – interests paid in gold for borrowing gold. Gold lease rates are economically significant in magnitude and display substantial variations over time. Using a term structure model with "unspanned" risk factors, we find that risk premia in gold lease rates are highly time-varying and strongly increasing in the level and slope of gold lease rates, as well as in gold volatility. Expected excess returns of "gold bonds" are mostly positive, suggesting that they are perceived as risky investments.