Hedges and safe havens: An examination of stocks, bonds, gold, oil and exchange rates
TL;DR: The authors investigated the return relations between major asset classes using data from both the US and the UK and found that gold can be regarded as a safe haven against exchange rates in both countries, highlighting its monetary asset role.
About: This article is published in International Review of Financial Analysis.The article was published on 2013-09-01. It has received 452 citations till now. The article focuses on the topics: Asset allocation & Asset (economics).
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TL;DR: The authors examined the dependence structure between the emerging stock markets of the BRICS countries and influential global factors using the quantile regression approach, and found that the stock markets exhibit dependence with the global stock and commodity markets (S&P index, oil, and gold) as well as changes in the U.S. stock market uncertainty (CBOE Volatility Index).
347Â citations
TL;DR: In this paper, the authors investigated whether Bitcoin can act as a hedge or safe haven against world currencies and found that Bitcoin is a safe haven during periods of extreme market turmoil for the CAD, CHF and GBP.
323Â citations
TL;DR: In this paper, the authors assess the roles of Bitcoin as a hedge, a safe haven and/or a diversifier against extreme oil price movements, in comparison to the corresponding roles of gold.
314Â citations
TL;DR: In this article, Baur and Lucey (2010) augmentation of their model to a smooth transition regression (STR) using an exponential transition function which splits the regression model into two extreme regimes: periods in which stock returns are on average and therefore allowing to test whether gold acts as a hedge for stocks, the other one accounts for extreme market conditions where the volatility of the stock returns is high.
297Â citations
TL;DR: In this article, the authors examined the asymmetric impact of gold prices, oil prices and their associated volatilities on stock markets of emerging economies and found that the stock markets in the emerging economies are more vulnerable to bad news and events that result in uncertain economic conditions.
227Â citations
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TL;DR: In this paper, the authors present a critique of expected utility theory as a descriptive model of decision making under risk, and develop an alternative model, called prospect theory, in which value is assigned to gains and losses rather than to final assets and in which probabilities are replaced by decision weights.
Abstract: This paper presents a critique of expected utility theory as a descriptive model of decision making under risk, and develops an alternative model, called prospect theory. Choices among risky prospects exhibit several pervasive effects that are inconsistent with the basic tenets of utility theory. In particular, people underweight outcomes that are merely probable in comparison with outcomes that are obtained with certainty. This tendency, called the certainty effect, contributes to risk aversion in choices involving sure gains and to risk seeking in choices involving sure losses. In addition, people generally discard components that are shared by all prospects under consideration. This tendency, called the isolation effect, leads to inconsistent preferences when the same choice is presented in different forms. An alternative theory of choice is developed, in which value is assigned to gains and losses rather than to final assets and in which probabilities are replaced by decision weights. The value function is normally concave for gains, commonly convex for losses, and is generally steeper for losses than for gains. Decision weights are generally lower than the corresponding probabilities, except in the range of low prob- abilities. Overweighting of low probabilities may contribute to the attractiveness of both insurance and gambling. EXPECTED UTILITY THEORY has dominated the analysis of decision making under risk. It has been generally accepted as a normative model of rational choice (24), and widely applied as a descriptive model of economic behavior, e.g. (15, 4). Thus, it is assumed that all reasonable people would wish to obey the axioms of the theory (47, 36), and that most people actually do, most of the time. The present paper describes several classes of choice problems in which preferences systematically violate the axioms of expected utility theory. In the light of these observations we argue that utility theory, as it is commonly interpreted and applied, is not an adequate descriptive model and we propose an alternative account of choice under risk. 2. CRITIQUE
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TL;DR: In this article, a new class of multivariate models called dynamic conditional correlation models is proposed, which have the flexibility of univariate generalized autoregressive conditional heteroskedasticity (GARCH) models coupled with parsimonious parametric models for the correlations.
Abstract: Time varying correlations are often estimated with multivariate generalized autoregressive conditional heteroskedasticity (GARCH) models that are linear in squares and cross products of the data. A new class of multivariate models called dynamic conditional correlation models is proposed. These have the flexibility of univariate GARCH models coupled with parsimonious parametric models for the correlations. They are not linear but can often be estimated very simply with univariate or two-step methods based on the likelihood function. It is shown that they perform well in a variety of situations and provide sensible empirical results.
5,695Â citations
TL;DR: This paper proposed a new generalized autoregressive conditionally heteroskedastic (GARCH) process, the asymmetric generalized dynamic conditional correlation (AG-DCC) model, which allows for series-specific news impact and smoothing parameters and permits conditional asymmetries in correlation dynamics.
Abstract: This paper proposes a new generalized autoregressive conditionally heteroskedastic (GARCH) process, the asymmetric generalized dynamic conditional correlation (AG-DCC) model The AG-DCC process extends previous specifications along two dimensions: it allows for series-specific news impact and smoothing parameters and permits conditional asymmetries in correlation dynamics The AG-DCC specification is well suited to examine correlation dynamics among different asset classes and investigate the presence of asymmetric responses in conditional variances and correlations to negative returns We employ the AG-DCC model to analyze the behavior of international equities and government bonds While equity returns show strong evidence of asymmetries in conditional volatility, little is found for bond returns However, both equities and bonds exhibit asymmetries in conditional correlations, with equities responding stronger than bonds to joint bad news The article also finds that, during periods of financial turmoil, equity market volatilities show important linkages, and conditional equity correlations among regional groups increase dramatically Furthermore, in January 1999 with the introduction of the euro, we document significant evidence of a structural break in correlation although not in
1,733Â citations
TL;DR: In this article, constant and time-varying relations between U.S., U.K. and German stock and bond returns and gold returns were investigated to investigate gold as a hedge and a safe haven.
Abstract: Is gold a hedge, defined as a security that is uncorrelated with stocks or bonds on average, or is it a safe haven, defined as a security that is uncorrelated with stocks and bonds in a market crash? We study constant and time-varying relations between U.S., U.K. and German stock and bond returns and gold returns to investigate gold as a hedge and a safe haven. We find that gold is a hedge against stocks on average and a safe haven in extreme stock market conditions. A portfolio analysis further shows that the safe haven property is short-lived.
1,272Â citations