Is gold a weak or strong hedge and safe haven against stocks? Robust evidences from three major gold-consuming countries

doi:10.1080/00036846.2017.1310998

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Is gold a weak or strong hedge and safe haven against stocks? Robust evidences from three major gold-consuming countries

Journal Article•DOI•

Is gold a weak or strong hedge and safe haven against stocks? Robust evidences from three major gold-consuming countries

Arif Billah Dar¹, Debasish Maitra²•Institutions (2)

Institute of Management Technology, Ghaziabad¹, Indian Institute of Management Indore²

04 Apr 2017-Applied Economics (Routledge)-Vol. 49, Iss: 53, pp 5491-5503

TL;DR: In this article, the safe-haven property of gold was investigated by analysing the decile-wise conditional correlation between stock returns and gold returns at different deciles of stock returns.

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Abstract: In this article, we test nexus between gold and stocks for the three major gold consumers by using the range of methodologies. First, we assess if there is any time-varying correlation between the two assets. We fail to find any significant time-varying correlation between gold and stock returns in India and the United States. Second, we attempted to investigate the safe-haven property of gold by analysing the decile-wise conditional correlation between stock returns and gold returns at different deciles of stock returns. Third, in order to test the robustness of the results drawn from the decile-wise correlation, we employ wavelet coherence in continuous wavelet framework to test the time and frequency varying nexus between the pair of assets. The range of methodologies employed seems to indicate the weak hedge and safe haven-property of gold for stocks.

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Gold investment as an inflationary hedge: Cointegration evidence with allowance for endogenous structural breaks

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Andrew C. Worthington¹, Mosayeb Pahlavani•Institutions (1)

University of Wollongong¹

01 Jan 2006

TL;DR: In this article, the authors test for the presence of a stable long-run relationship between the price of gold and inflation in the United States from 1945 to 2006 and from 1973 to 2006.

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Abstract: This note tests for the presence of a stable long-run relationship between the price of gold and inflation in the United States from 1945 to 2006 and from 1973 to 2006. Since both the gold market and the inflationary regime have been subjected to structural change over time, a novel unit root testing procedure is employed which allows for the timing of significant breaks to be estimated, rather than assumed exogenous. After taking these breaks into account, a modified cointegration approach provides strong evidence of a cointegrating relationship between gold and inflation in the post-war period and since the early 1970s. The results lend support to the widely held view that direct and indirect gold investment can serve as an effective inflationary hedge.

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173 citations

Posted Content•

Gold and the U.S. Dollar: Tales from the Turmoil

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Massimiliano Marzo¹, Paolo Zagaglia¹•Institutions (1)

University of Bologna¹

26 Apr 2010-Research Papers in Economics

TL;DR: In this article, the relationship between gold prices and the U.S. Dollar has been investigated by using spot prices of gold and spot bilateral exchange rates against the Euro and the British Pound to study the pattern of volatility spillovers.

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Abstract: We investigate how the relation between gold prices and the U.S. Dollar has been affected by the recent turmoil in financial markets. We use spot prices of gold and spot bilateral exchange rates against the Euro and the British Pound to study the pattern of volatility spillovers. We estimate the bivariate structural GARCH models proposed by Spargoli e Zagaglia (2008) to gauge the causal relations between volatility changes in the two assets. We also apply the tests for change of co-dependence of Cappiello, Gerard and Manganelli (2005). We document the ability of gold to generate stable comovements with the Dollar exchange rate that have survived the recent phases of market disruption. Our findings also show that exogenous increases in market uncertainty have tended to produce reactions of gold prices that are more stable than those of the U.S. Dollar.

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58 citations

Journal Article•DOI•

Are stablecoins truly diversifiers, hedges, or safe havens against traditional cryptocurrencies as their name suggests?

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Gang-Jin Wang¹, Xin-yu Ma¹, Hao-yu Wu¹•Institutions (1)

Hunan University¹

01 Dec 2020-Research in International Business and Finance

TL;DR: Stablecoins can serve as safe havens in specific situations, although most act merely as an effective diversifier in normal market conditions, and the safe haven property of stablecoins changes across market conditions.

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57 citations

Journal Article•

Going for gold.

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Rob Mair

01 Jul 2012-The journal of family health care

48 citations

Journal Article•DOI•

COVID-19 Pandemic: Is the Crypto Market a Safe Haven? The Impact of the First Wave

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Darko Vukovic, Moinak Maiti, Zoran Grubišić, Elena M. Grigorieva, Michael Frömmel - Show less +1 more

31 Jul 2021-Sustainability

TL;DR: In this paper, the authors investigated whether the crypto market is a safe haven and found that during the first wave of the COVID-19 crisis, gold and oil, as typical global commodities, could have been diversifiers.

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Abstract: The present study investigated whether the crypto market is a safe haven. The study argues that during the first wave of the COVID-19 crisis, gold and oil, as typical global commodities, could have been diversifiers. The study developed a unique COVID-19 global composite index that measures COVID-19 pandemic time-variant movements on each day. The study used OLS (ordinary least squares), quantile, and robust regressions to check whether the COVID-19 crisis has had any significant direct influence on the crypto market. The OLS, quantile, and robust regressions estimates confirmed that there was no statistically significant direct influence of the COVID-19 crisis on the crypto market in the first wave period. However, the study found spillovers from risky assets (S&P 500) on the crypto market, with Tether as an exception. Due to this special characteristic, Tether might present a safe haven within the crypto market.

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29 citations

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Journal Article•DOI•

A Practical Guide to Wavelet Analysis.

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Christopher Torrence¹, Gilbert P. Compo¹•Institutions (1)

University of Colorado Boulder¹

01 Jan 1998-Bulletin of the American Meteorological Society

TL;DR: In this article, a step-by-step guide to wavelet analysis is given, with examples taken from time series of the El Nino-Southern Oscillation (ENSO).

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Abstract: A practical step-by-step guide to wavelet analysis is given, with examples taken from time series of the El Nino–Southern Oscillation (ENSO). The guide includes a comparison to the windowed Fourier transform, the choice of an appropriate wavelet basis function, edge effects due to finite-length time series, and the relationship between wavelet scale and Fourier frequency. New statistical significance tests for wavelet power spectra are developed by deriving theoretical wavelet spectra for white and red noise processes and using these to establish significance levels and confidence intervals. It is shown that smoothing in time or scale can be used to increase the confidence of the wavelet spectrum. Empirical formulas are given for the effect of smoothing on significance levels and confidence intervals. Extensions to wavelet analysis such as filtering, the power Hovmoller, cross-wavelet spectra, and coherence are described. The statistical significance tests are used to give a quantitative measure of change...

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12,803 citations

"Is gold a weak or strong hedge and ..." refers background in this paper

...As shown by Torrence and Compo (1998), the wavelet power significance testing can be done by judging against the null hypothesis stating that the data-generating process is given by an AR(0) or AR(1) stationary process, having a background power spectrum (Pk)....
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Journal Article•DOI•

Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models

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Robert F. Engle¹•Institutions (1)

University of California, San Diego¹

01 Jul 2002-Journal of Business & Economic Statistics

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.

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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.

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5,695 citations

"Is gold a weak or strong hedge and ..." refers background or methods in this paper

...However, positive conditional correlation in the United States is also not We followed DCC–GARCH of Engle (2002) for bivariate GARCH analysis of returns on stocks, and gold....
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...Dynamic correlations using DCC–GARCH approach We estimate the DCC–GARCHmodel of Engle (2002) in a bivariate setting involving returns on stocks and gold....
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Journal Article•DOI•

Is Gold a Hedge or a Safe Haven? an Analysis of Stocks, Bonds and Gold

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Dirk G. Baur¹, Brian M. Lucey², Brian M. Lucey³, Brian M. Lucey⁴•Institutions (4)

University of Western Australia¹, Jiangxi University of Finance and Economics², University of Economics, Ho Chi Minh City³, Trinity College, Dublin⁴

01 Feb 2009-Social Science Research Network

TL;DR: In this paper, the authors investigated the relationship between stocks, bonds and gold and found that gold is a hedge against stocks on average and a safe haven in extreme stock market conditions.

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Abstract: Is gold a hedge against sudden changes in stock and bond returns, or does it instead have a subtly different property, that of being a safe haven? This paper addresses these two interlinked questions. A safe haven is defined as a security that is uncorrelated with stocks and bonds in case of a market crash. This is counterpoised against a hedge, defined as a security that is uncorrelated with stocks or bonds on average. We study constant and time-varying relationships between stocks, bonds and gold in order to investigate the existence of a hedge and a safe haven. The empirical analysis examines US, UK and German stock and bond returns and their relationship with gold returns. We find that gold is a hedge against stocks on average and a safe haven in extreme stock market conditions. This finding suggests that the existence of a safe haven enhances the stability and resiliency of financial markets since it reduces investors' losses at times when a reduction is needed the most. A portfolio analysis further shows that the safe haven property is extremely short-lived so that an investor buying gold one day after a shock loses money.

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1,255 citations

"Is gold a weak or strong hedge and ..." refers background in this paper

...Baur and Lucey (2010) and Kaul and Sapp (2006) define hedge as an asset, which remains uncorrelated (weak hedge) or negatively correlated (strong hedge), on average, with any other asset held by the investors....
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...A relatively scant body of studies like Baur and Lucey (2010), Baur and McDermott (2010) have attempted to study these two properties of gold for stocks....
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...Recent studies report that gold negatively correlates with stocks (Baur and Lucey 2010; Baur and McDermott 2010). While financial markets in the United States witnessed precipitous fall during July 2007–March 2009, gold prices rose by 42% around the same time (Baur and McDermott, 2010). Wang et al. (2016) argue that extreme risks are more quickly transmitted during the time of post-crisis than in the pre-crisis, an effect related to the safehaven or hedging property of gold....
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...Recent studies report that gold negatively correlates with stocks (Baur and Lucey 2010; Baur and McDermott 2010). While financial markets in the United States witnessed precipitous fall during July 2007–March 2009, gold prices rose by 42% around the same time (Baur and McDermott, 2010). Wang et al. (2016) argue that extreme risks are more quickly transmitted during the time of post-crisis than in the pre-crisis, an effect related to the safehaven or hedging property of gold. The increase in gold demand in India, China and the Middle East is one of the factors for the soaring gold demand in international markets (Worthington and Pahlavani, 2007). The significance of gold in the financial system is very apparent because of the interest shown by institutional and individual investors. Both individual and institutional investors consider gold as an alternative asset class (Shahbaz et al., 2014). Despite this, the hedge and safe-haven property of gold have not been subjected to rigorous empirical research. A relatively scant body of studies like Baur and Lucey (2010), Baur and McDermott (2010) have attempted to study these two properties of gold for stocks....
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...Baur and Lucey (2010) and Kaul and Sapp (2006) define hedge as an asset, which remains uncorrelated (weak hedge) or negatively correlated (strong hedge), on average, with...
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Journal Article•DOI•

Is Gold a Safe Haven? International Evidence

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Dirk G. Baur¹, Thomas K. J. McDermott², Thomas K. J. McDermott³•Institutions (3)

University of Western Australia¹, National University of Ireland, Galway², London School of Economics and Political Science³

01 Sep 2009-Social Science Research Network

TL;DR: This paper examined the role of gold in the global financial system and found that gold is both a hedge and a safe haven for major European stock markets and the US but not for Australia, Canada, Japan and large emerging markets such as the BRIC countries.

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Abstract: The aim of this paper is to examine the role of gold in the global financial system. We test the hypothesis that gold represents a safe haven against stocks of major emerging and developing countries. A descriptive and econometric analysis for a sample spanning a 30 year period from 1979-2009 shows that gold is both a hedge and a safe haven for major European stock markets and the US but not for Australia, Canada, Japan and large emerging markets such as the BRIC countries. We also distinguish between a weak and strong form of the safe haven and argue that gold may act as a stabilizing force for the financial system by reducing losses in the face of extreme negative market shocks. Looking at specific crisis periods, we find that gold was a strong safe haven for most developed markets during the peak of the recent financial crisis.

...read moreread less

1,158 citations

Journal Article•DOI•

Is gold a safe haven? International evidence

[...]

Dirk G. Baur¹, Thomas K. J. McDermott²•Institutions (2)

University of Western Australia¹, Trinity College, Dublin²

01 Aug 2010-Journal of Banking and Finance

TL;DR: This article examined the role of gold in the global financial system and found that gold is both a hedge and a safe haven for major European stock markets and the US but not for Australia, Canada, Japan and large emerging markets such as the BRIC countries.

...read moreread less

Abstract: The aim of this paper is to examine the role of gold in the global financial system. We test the hypothesis that gold represents a safe haven against stocks of major emerging and developing countries. A descriptive and econometric analysis for a sample spanning a 30 year period from 1979 to 2009 shows that gold is both a hedge and a safe haven for major European stock markets and the US but not for Australia, Canada, Japan and large emerging markets such as the BRIC countries. We also distinguish between a weak and strong form of the safe haven and argue that gold may act as a stabilizing force for the financial system by reducing losses in the face of extreme negative market shocks. Looking at specific crisis periods, we find that gold was a strong safe haven for most developed markets during the peak of the recent financial crisis.

...read moreread less

1,114 citations