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Why is gold a safe haven?
Abstract
Gold is a prominent safe haven asset but risky compared to other safe haven assets such as US government bonds. We identify unique features of gold that explain why investors under stress buy the riskier alternative gold. We argue that the decision to buy gold is rooted in behavioral biases associated with gold’s history as a currency, a store of value and a safe haven. The empirical analysis shows that gold was a particularly strong safe haven in the aftermath of September 11, 2001 and the Lehman bankruptcy in September 2008. The Global Financial Crisis also exemplifies the role of the US dollar as a safe haven currency and how it can mask the safe haven effect of gold. Finally, we find that safe haven assets do not exacerbate crises via a negative feedback effect.
... For some investors, loss avoidance is more important than the prospective return associated with the investment asset (Hwang and Satchell, 2010). Economic theory suggests that safe-haven asset is expected to be uncorrelated or move in different directions with financial market stress, and investors' loss aversion motivate them to seek such assets (Baur and Lucey, 2010;Baur and McDermott, 2016;Ji et al., 2020;Tronzano, 2020;Gomis-Porqueras et al., 2022). Acquiring safe investments such as bonds or gold during periods of economic uncertainty is therefore quite common. ...
... Acquiring safe investments such as bonds or gold during periods of economic uncertainty is therefore quite common. Baur and McDermott (2016) highlighted that, under stress, gold is a natural choice for investors, given investors' prior experience and a lack of available alternatives. Several studies have demonstrated the safe-haven asset properties of gold in many events (e.g., Akhtaruzzaman et al., 2021;Baur and McDermott, 2010;Baur and Lucey, 2010;Ji et al., 2020;Gomis-Porqueras et al., 2022). ...
... The net absorber role of gold, Bitcoin, and other financial stress categories suggest that gold, Bitcoin, and those financial stress categories react to stress events related to equity valuation and volatility. In times of increasing uncertainty during the pandemic, shifts in investors' risk perceptions and behavior lead to higher volatility (Baur and McDermott, 2016). The reaction to equity valuation financial stress reflects investors' confidence and risk appetites, leading to changes in their asset allocation strategies and confirms investors' loss aversion approach for equity market investment (see, Tversky and Kahneman, 1991). ...
Fragility of the financial system has been a matter of global concern. This study examines connectedness and spillovers among financial stress index (FSI) categories, regional FSI, gold, and Bitcoin. We employed time-varying and frequency domain approach of Chatziantoniou et al. (2021) using weekly data. We confirmed the interdependencies and connectedness of gold and Bitcoin with global categorical and regional financial stress. We find that credit FSI category is the largest transmitters in every model, implying that credit risk is an important driver of financial stress. United States is the largest stress contributor within the regional category. Additionally, connectedness among FSI categories, regional FSI, gold and Bitcoin has intensified during COVID-19 pandemic. In the short run, while gold and Bitcoin are net shocks receivers of categorical and regional financial stress, they are net shocks transmitters in the long run. Hence, gold and Bitcoin lost their safe-haven properties in the short-run but retained their values in the long-run. The findings expand understanding on the role of gold and Bitcoin for investors seeking protection from global financial stress.
... Gold has also been employed as a hedge or haven against assets like bonds, stocks, and other financial assets for years now and is preferred as an alternative investment by risk-averse investors (Baur & McDermott, 2010;Beckmann & Czudaj, 2013;Dyhrberg, 2016a;Van Hoang et al., 2016;Klein et al., 2018;Shahzad et al., 2020;Owusu Junior et al., 2022). Without a doubt, significant attention has shifted from gold to cryptocurrencies (Baur et al., 2016;Van Hoang et al., 2016;Bouri, Jalkh et al., 2017;Das & Kannadhasan, 2018;Shahzad et al., 2020;Owusu Junior et al., 2020;etc.). Exposure to individual asset risks can be reduced in line with the modern portfolio theory (Markowitz, 1952) by holding assets of a diversified portfolio. ...
... Many works have explored the potential of cryptocurrencies, mostly Bitcoin, and of gold to act as safe havens or hedge in global stock markets (Baur & McDermott, 2010;Baur & Lucey, 2010;Van Hoang et al., 2016;Baur et al., 2016;Dyhrberg, 2016a;Dyherberg, 2016b;Bouri, Gupta et al., 2017;Bouri, Jalkh et al., 2017Feng et al., 20182018;Shahzad et al., 2019;JERIBI et al., 2020), but few studies concentrate on African stocks (Kumah et al., 2021). Some studies also consider the nexus between these financial time series during the COVID-19 pandemic period (Conlon & McGee, 2020;Demir et al., 2020;Ghorbel & Jeribi, 2021). ...
... Since it is practically impossible and for the sake of simplicity to present all possible combination, we show the relationship with stock markets as the dependent variables. This is necessary because cryptocurrencies and gold act as a possible transmitter to African stocks (Asafo-Adjei, Owusu Baur & Lucey, 2010;Baur et al., 2016). This rests on the fact that African stocks are mostly detached from the global (Asafo-Adjei et al., 2020;Boateng, Adam & Owusu Junior, 2021) with less tendency to transmit speculative bubbles to other financial assets to act as potential receiver of shocks. ...
The specific properties of assets such as cryptocurrencies, gold, and stocks have welcomed more empirical studies in assessing their nexus. As a result, market conditions, whether good or bad, become imperative to assess the benefits of safe have, hedges or diversification. Also, the presence of uncertainties in markets may have asymmetrical effects which make it necessary to assess their impact over time. The emergence of COVID-19 pandemic as a global uncertainty has altered the dynamics of most financial markets. Consequently, this may influence the lead/lag relationships in most financial time series at various frequencies to contribute to the heterogeneous nature of market participants. Hence, the study examines the interdependencies between cryptocurrencies, selected stocks markets of Africa, and Gold returns in a time-frequency domain before and during the COVID-19 pandemic. Using a day-to-day observations, from August 8th, 2015 to May 5th, 2020, we assess the benefits of portfolio diversification, hedges, and safe haven with the bi-wavelet technique. The findings reveal that gold and cryptocurrencies provide a safe haven, diversification and, hedge for investors of African stock especially in the Ghanaian stock market (short-term) and also during this COVID-19 period. These findings contribute to the literature on financial market interdependencies, asymmetries to demonstrate financial market participants’ diverse investment horizons. Again, policymakers and governments of these stock markets should institute a sound system of controls in regulating stock markets. This will enable the benefits of safe haven, hedges or diversification to be efficiently realized for Gold and Cryptocurrencies during different market conditions.
... There is a related literature where Granger predictability from money supply and expected inflation to gold prices, which points to a fiat world relation between gold and monetary policy that also occurs in a gold standard (Benk & Gillman, 2020). Even though the safe-haven properties of other assets such as silver and the US dollar are less studied, there is some evidence that they can serve as such in times of heightened market stress (Baur & McDermott, 2016;Hillier et al., 2006;Li & Lucey, 2017;Sakemoto, 2018). ...
... Erb and Harvey (2013) confirm a significant negative relationship between gold returns and real interest rates. Baur and McDermott (2016) show gold, US Treasury bonds, the US dollar, and the Swiss franc act as "safehaven" assets during periods of market stress. Li and Lucey (2017) show that gold, silver, platinum, and palladium serve as safe-haven assets and hedge against market declines. ...
... Zhang and Wang (2021) find volatility spillovers between financial stress and gold to be strong over short-term horizons while financial stress in the U.S. has a medium-term impact on gold prices. Baur and McDermott (2016) argue that the attractiveness of gold particularly during financial stress is rooted in behavioral biases because of gold's history as a currency, a store of value, and a safe-haven as it offers investors some protection from other risks that bonds cannot offer; namely, inflation risks, currency risk, and default risk. Moreover, there can be feedback effects, positive or negative, between a safe-haven asset such as gold and indicators of financial stress. ...
In this paper, we investigate the relationship between gold, silver, and the US dollar returns and financial stress to shed light on the circumstances where these assets serve as attractive investment vehicles and whether the assets signal financial conditions ahead. Using weekly data from 1994 through 2020 and predictability-in-mean, predictability-in-variance, and predictability-in-distribution, we examine the relationship between returns on gold, silver, and the US dollar and the St Louis Financial Stress Index (STLFSI). While we find no Granger predictability in the mean between gold returns and the aggregate STLFSI, there is some evidence of Granger predictability between silver and US dollar returns and financial stress. However, test results show significant bidirectional Granger predictability in variance between STLFSI and gold, silver, and US dollar returns. Predictability-in-distribution tests generally show significant bidirectional relationships between financial stress and gold, silver, and US dollar returns at the left and right tail of the distribution. We confirm the safe-haven properties of gold, silver, and the US dollar and find novel evidence that very low returns on these assets signal financial calm, and unusually high returns signal high financial stress ahead. In this sense, extreme gold, silver, and US dollar returns are harbingers of calm times or financial distress to come, acting as early financial market news providing risk guideposts for safety.
... Safe haven assets are preferred assets for investors seeking refuge to secure capital during market downturns. During times of turbulence, it is neither positively nor negatively correlated with other assets or portfolios (Baur & McDermott, 2016). During a crisis, gold is the most effective safe-haven asset (Baur & McDermott, 2016;Creti et al., 2013;Flavin et al., 2014;Kayral et al., 2023). ...
... During times of turbulence, it is neither positively nor negatively correlated with other assets or portfolios (Baur & McDermott, 2016). During a crisis, gold is the most effective safe-haven asset (Baur & McDermott, 2016;Creti et al., 2013;Flavin et al., 2014;Kayral et al., 2023). ...
Russia-Ukraine war caused u European financial system experienced unprecedented panic because of its reliance and proximity to war areas. The research aims to examine the safe-haven assets and the European stock market dynamics before and during the Russia-Ukraine war. The data spans the six months from September 23, 2021, to September 25, 2022, which are both before and during the Russia-Ukraine War. The stock indices of France, Germany, and Finland were chosen because they represent the largest economies in European Union. The findings indicate a shift in the source and direction of shocks between safe-haven assets and the European stock market before and during the war. Before the war, Finland positively influenced by gold. After the war, France, Germany, and Finland negatively influenced by gold while positively influenced by silver. Important research ramifications for comprehending how the geopolitical crisis interacts with the European financial markets.
... In addition, there are concerns about the long-term impact of the pandemic on investment in new and renewable energy, which could hamper the global transition towards a green environment (Kuzemko et al., 2020). On the other hand, one of sub-sector from the energy sector, which is classified as a commodity sub-sector, particularly gold, has experienced an increase during the Covid-19 pandemic because gold is considered stable as a haven asset in value in situations of economic uncertainty (Akhtaruzzaman et al., 2021;Baur and McDermott, 2016). Likewise, the movement of the stock price of a gold commodity producing company in Indonesia, PT Aneka Tambang (Emitent Code: ANTM), which tends to be stable during the Covid-19 pandemic (Adiningsih and Azib, 2021). ...
... Investments in gold as safe-haven assets have also been disclosed before the Covid-19 pandemic occurred. Baur and McDermott (2016) found the reason why gold is considered a safe-haven asset even though it is riskier than investment in US government bonds (US Treasury bills), because gold has unique features and biased behaviour of investors who still perceive gold as a foreign currency in the past. This is reinforced by research conducted by Salisu et al. (2021) which confirmed investing in gold as a safe-haven asset compared to investing in stocks in the United States during the economic crisis, even though the level of effectiveness is not as good as before the pandemic hit the world. ...
Energy sector is not excluded from the recession in global economics. However, one can be stable during such outbreak was gold prices which showed incredible stable prices and relatively increasing. That also affected on daily stock prices for the gold producing companies such as PT Aneka Tambang (issuer code: ANTM) that showed conversely increasing than other mining sector companies. This study aims to investigate causal relationships between ANTM stock prices and Indonesian exchange rates in order to have strategic decision-making for investors by employing State Space model and to provide forecasting daily data for both variables. The study found that the State Space model confirmed their dynamic relationship, in which ANTM was not only affected by itself but also by the movement of exchange rates. The forecasting graphs then provide the insight of strategic decision-making for investors to strongly invest on gold-based company as they have an increasing projection for the next 20 days.
... On the one hand, some sovereign bonds are considered by the market to be safe haven assets, and an increase in geopolitical risk could lead to a decline in the yields of such bonds. For example, Treasury bills and bonds issued by the government of the United States of America (US) have proven to act as safe havens against heightened risk factors (Baur and McDermott 2016). ...
... The results of this study also contribute towards the formulation of a hedging strategy against geopolitical risk. High-quality sovereign bonds are often utilised in portfolios as a means to hedge against risks that cause a decline in the risky assets (Baur and McDermott 2016). The idea is that high-quality sovereign bonds should appreciate during risk-adverse periods, and thus, yields of these assets should decline. ...
Geopolitical risks and shocks such as military conflicts, terrorist attacks, and war tensions are known to cause significant economic downturns. The main purpose of this paper is to determine the dynamics between Australian sovereign bond yields and geopolitical risk. This is achieved by employing a quantile regression analysis. The findings of this study indicate that the impact of geopolitical risk on Australian sovereign yield dynamics is asymmetrical. Furthermore, an increase in geopolitical risk only impacts short-term yields at extreme regimes. However, the impact is, by and large, insignificant. On the other hand, an increase in geopolitical risk does have a statistically significant positive impact on medium- and long-term yields across most quantiles. Lastly, an increase in geopolitical risk tends to result in a steeper yield curve at the belly of the curve but causes the yield curve to flatten at the long end. This study is the first study that holistically examines the dynamics between geopolitical risk and Australian sovereign bond yields. The study thereby contributes to the body of knowledge on Australian bond yields, specifically, and adds to the sparse body of knowledge on the dynamics between geopolitical risk and sovereign bond yields. The findings of this study have implications for monetary policy makers, given that shifts in sovereign bond yields could impact all three core mandates of the Australian Reserve Bank. Furthermore, changes in the slope of the yieldcurve could be used by monetary policy makers to pre-empt changes in future economic growth. The results of this study also relate to fiscal policy formulation, given that yields directly impact the cost of government borrowing. Lastly, portfolio managers could benefit from the results of this study, as these results provide information on the ability of Australian sovereign bonds to hedge against geopolitical risk.
... Best and Grauer (2016) explored the relationship between prospect theory and portfolio selection. Prospect theory also explains the preference for gold over risk-free assets (Baur and McDermott, 2016). The novel coronavirus disease (COVID-19) rapidly evolved from a health crisis into a global financial meltdown. ...
... The most cited work in this cluster is by Gonzalez and Loureiro (2014), who explored the effects of lender and borrower personal characteristics (perceived attractiveness, age and gender) on online peer-to-peer lending decisions. Baur and McDermott (2016) argued that the decision to buy gold is rooted in behavioral biases linked with gold's history as a currency, a store of value and a haven. Zheng and Ashraf (2014) provided empirical evidence that banks in countries with high uncertainty avoidance, high longterm orientation and low masculinity pay lower dividends and are less likely to pay dividends. ...
... AlKhazalia et al. (2021), for example, showed that a portfolio consisting of gold had lower risk than a portfolio that excluded gold. Likewise, Baur and McDermott (2016), among others, showed that gold acted as a strong candidate for optimal portfolio construction during 11 September 2001 and the Lehman insolvency in September 2008. This strand of the literature argues that the ability of gold to reduce portfolio risk depends on a number of factors. ...
... This strand of the literature argues that the ability of gold to reduce portfolio risk depends on a number of factors. For instance, Baur and McDermott (2016) noted that behavioral biases linked with gold's history as a currency or a store of value was the main reason behind safe haven properties of gold. Another important reason behind the ability of gold to reduce portfolio risk is based on the assumption that when other assets do not do well, investors turn to precious metals, such as gold, to safeguard themselves against adverse performance of other investments. ...
During the COVID-19 pandemic, technology stocks, such as FAANG stocks (Facebook, Amazon, Apple, Netflix, and Google), attracted the attention of global investors due to the vast use of technology in daily business. However, technology stocks are generally considered risky stocks; hence, efficient risk management is required to construct an optimal portfolio. In this study, we investigate the volatility spillovers and dynamic conditional correlations among the daily returns of FAANG company stocks, gold, and sharia-compliant equity to construct the optimal portfolio weights and hedge ratios during the COVID-19 pandemic period by utilizing a multivariate GARCH framework. The dynamic conditional correlations reveal that both gold and sharia-compliant equities exhibit lower correlations with FAANG stocks during the COVID-19 pandemic, implying opportunities for portfolio diversification. The findings indicate that gold and shariah-compliant equity are good candidates to hedge FAANG stocks. These findings are highly relevant for international investors, asset managers, hedgers, and portfolio managers.
... The contribution of this study is fourfold. Firstly, unlike most previous studies that typically examine the relationship between the returns of a proposed safe-haven asset (e.g., gold or US Treasuries) and stock market returns to make inferences about whether it becomes negative during stress periods (see, Baur and McDermott, 2016;Choudhry et al., 2015 for gold;Flavin et al., 2014 for US Treasuries;Urquhart and Zhang, 2019 for Bitcoin;and Cheema et al., 2020;Raheem, 2021;Salisu et al., 2021;Dutta et al., 2020;Kinateder et al., 2021;Gupta et al., 2021 for the pandemic period), we consider a different and more direct framework that uncovers the Granger causality from risk indicators to safe-haven assets. In doing so, we consider several risk indicators and various safe-haven assets to provide a more comprehensive and in-depth analysis than the existing literature which tends to use one or at best two risk indicators and one or two safe-haven assets Huang et al., 2021;Wang et al., 2019). ...
... Government bonds, which offer a fixed return if held to maturity are considered safe havens in terms of high security and liquidity during turbulent periods (Zhou and Meng, 2021). In particular, several studies (e.g., Baur and McDermott, 2016;Flavin et al., 2014) find that US government bonds act as a safe haven for investors during periods of financial stress. In the second week of March 2020, due to the impact of the Covid19 pandemic, the US10 year Treasury yield fell to an all-time low of below 1 %. ...
This paper examines the Granger causality from Twitter-based economic uncertainty (TEU) to three safe-haven assets – Bitcoin, gold, and US10 year Treasury notes. Using daily data (June 1, 2011–August 30, 2021) and causality-in-quantiles and wavelets methods, the results indicate variability in the causality between the mean and variance, as well as the market conditions. TEU Granger-causes the returns and volatility of Treasuries, the volatility but not returns of Bitcoin, and neither the volatility nor the returns of gold for the raw series, and the causality is mostly significant at low and middle quantiles for Bitcoin and Treasuries. We include other risk factors and confirm the variability in the causality. Considering the possibility of a hidden causality over various frequency domains due to investors' heterogeneous expectations and perceptions of risk, the wavelet transforms-based causality tests reveal an increase in the predictability of risk indicators under specific investment horizons and market conditions. During the pandemic, TEU strongly predicts future volatility of Treasury and Bitcoin returns, reflecting the importance of social-media posts for safe-haven pricing. These findings highlight the benefits of applying the causality-in-quantiles test to decomposed series to determine the contribution of each scale to the causality over various market conditions.
... Gold has been proved to be a safe-haven asset in several periods and countries [10][11][12][13][14][15]. Therefore, in the volatile markets resulting from the Russia-Ukraine war, gold is still expected to be a safe-haven asset that is pursued by investors. ...
... When the VIX increases one unit, the gold futures price will rise by 1.75 dollars as the consequence. The result is consistent with previous hypothesis, and supports the common conclusion of [10], [11], [12], [13], [14] and [15]. In other words, investors are found to pursue more safe haven asset when they feel the stock market is in increasing uncertainty. ...
The war between Russia and Ukraine has become almost the most controversial topic in 2022. As Russia is a country with rich energy resources and the most sanctioned country in the world, the war influences global financial markets in various aspects. In this research, I investigate the gold, crude oil markets, military-industrial sector in the equity market, and investor sentiments to find the effect of the war. By comparing ex-post with ex-ante descriptive statistics and regressing asset prices on the VIX index, the research finds that the war increases all the three assets' prices and market uncertainty. Investor sentiments proxied by the VIX index have significantly positive impacts on gold price; positive but not significant impacts on crude oil price; significantly negative effects on military stocks.
... In this regard, gold is widely investigated to act as a hedge or a safe haven during certain market, economical and political conditions, and is found to provide protection to investors due to its diversification characteristics (Baur & McDermott, 2016;Iqbal, 2017;Rasheed et al., 2021a) but rare evidence is found in literature which highlights the diversification benefits of real estate as alternative investment option, especially in Pakistan. Therefore, current research investigates the relationship of real estate not only with different kinds of stocks and PSX sectors, rather it also incorporates gold in its investigation to highlight the fact that whether investors considering stocks and gold in their diversified portfolios, must also consider real estate for diversification purpose? ...
... Empirical analysis indicates that real estate in Pakistan does not exhibit any kind of relationship with stock market, gold or the sub-asset classes under study. As indicated by Baur and McDermott (2016) an asset having lower or no correlation with other assets could provide better diversification in portfolios so through indicating the absence of relationship with all the other assets under study, real estate qualifies the criteria for being a good diversifier for investment portfolios of Pakistani investors. As Pakistan has a long history of its financial markets and economy being hit by uncertainties most of the time (Rasheed et al., 2021a) so Pakistani investors must focus on incorporating such assets, like real estate, in their portfolios that can provide them diversification benefits by indicating no relationship with other assets. ...
Traditional assets, like stocks and bonds, are mostly found to be highly influenced by uncertainties, and cause distress for investors most of the time, consequently investors look for safe investment options that can provide diversification benefits to cope with uncertainties. So, current research unveils the diversification characteristics of real estate by investigating its relationship with a set of selected financial assets like KSE-100 index, gold, sub-asset classes; growth stocks, value stocks, large stocks, small stock, and sector’s stock. Autoregressive distributive lag (ARDL) approach is employed on monthly time series data for a time span of 2011 to 2019. Findings indicate that real estate behaves quite differently than all of these assets and holds good diversification potential for Pakistani investors because it exhibits no relationship with any of the assets under study. Findings suggest that Pakistani investors must incorporate real estate in their asset allocation strategy for diversifying their portfolios. Current research contributes to literature by unveiling the diversification potential of real estate in comparison to a set of financial variables that are rarely investigated in previous literature. Moreover, it contributes well to the knowledge of Pakistani investors and asset/investment managers to make healthy investment decisions.
... In this paper, we examine green bond prices in comparison with conventional bonds before and during the COVID-19 pandemic as an unforeseen event for market participants. External shocks, such as the pandemic, initiate structural breaks in market phases and can provide extreme market volatility which leads investors as a consequence to restructure their portfolios to financial instruments, which historically navigated safely through periods of stress (Baur and McDermott 2016;Kinateder et al. 2021). The COVID-19 pandemic which has started in 2020 represented an extreme external shock to international financial markets (Carlsson-Szlezak et al. 2019). ...
We analyze green and conventional bonds during regular market periods and within times of extreme volatility, the COVID-19 pandemic. We find a negative premium (greenium) of 1.6 bp before the outbreak of COVID-19, but during the times of extreme market stress, this greenium widens to 3.5 bp as our results show a significant outperformance of green bonds. The results indicate that green bonds are more resilient during risk-off periods than non-green bonds. In addition, the greenium effect is moderated by the issuer's country environmental performance as the greenium is more pronounced for issuers from non-green countries prior to COVID-19. We do not find differences between green and non-green countries since COVID-19.
... In other words, adding commodities to a portfolio of traditional assets helps to reduce risk by taking advantage of their low correlation with other asset classes (Yan and Garcia, 2017;Zhang and Mani, 2021). To this end, voluminous literature strands testify the beneficial role of commodity inclusion in the portfolio, for instance, gold ( Baur and McDermott, 2016;Baur and Lucey, 2010;Baur and McDermott, 2010), oil (Elie et al., 2019;Mensi et al., 2021a;Abakah et al., 2023), traditional stock (Arouri et al., 2015;Ibrahim, 2012;Chua et al., 1990) and conventional bond (Ali et al., 2022b;Sakurai and Kurosaki, 2022;Drobetz et al., 2020). ...
With growing attention and concern regarding green instruments, in this paper, we test for the dynamic connectedness of green cryptocurrencies, green investment, conventional commodities and equities using wavelet coherence and the effect of uncertainty on their co-movements from 2018 to 2023. Contrary to previous research, our findings reveal that green cryptocurrencies do not exhibit hedge or safe haven properties, instead behaving no differently than diversifiers. Furthermore, we show a significant influence of financial uncertainty on the interconnectedness between green cryptocurrencies and other assets, indicating heightened exposure during market turmoil. As a result, less emphasis on green cryptocurrencies portfolio weightings should be placed and greater emphasis on green bonds and gold at time of financial distress. Their limited risk-reducing potential should also be considered for regulatory frameworks. Additionally, we note the similarities between green cryptocurrencies and conventional counterparts, evidenced by their dynamic homogeneity with Bitcoin and Ethereum, suggesting synchronization. Consequently, conventional cryptocurrencies could serve as proxies for green counterparts in portfolio management strategies. These findings contribute to the understanding of green cryptocurrency dynamics and have implications for investment decision-making and risk management strategies in sustainable finance.
... It is known that in times of uncertainty the attractiveness of gold increases. 12 However, most traded commodities are known to be sensitive to increasing uncertainty. 13,14 This evidence holds especially for commodities related to the energy sector (e.g. ...
This paper proposes a probabilistic model for the evaluation of the peak components of the return of a commodity. The ground of the study lies in the evidence that the spikes in the returns are due to the shocks occurring in the external environment. We follow an approach based on a particular class of point processes—the Spatial Mixed Poisson Processes—by exploiting an invariance property for such a class. The theoretical framework is used for presenting an estimation of the procedure of the returns based on the available information. An empirical instance based on different commodities’ returns and the abnormal returns of the volatility index as external shocks are presented to motivate our theoretical approach
... Although the gold price is influenced by the short run variation in the US price level, inflation volatility, credit risk, the USD trade weighted exchange rate (Ghosh et al. 2004;Gorton and Rouwenhorst 2006;Kolluri 1981), besides a considerable parallel relationship between gold and equity returns (Boako et al. 2019), the long run positive relationship between gold and inflation makes it a long-term hedge against inflation (Levin and Wright 2006). Globally, investors use gold as a safe haven for their investment to minimize possible losses (Bassil et al. 2019;Baur and Lucey 2010;Baur and McDermott 2016). This could be owing to its stability irrespective of economic or political circumstances and its Bhuiyan et al. ...
To measure the diversification capability of Bitcoin, this study employs wavelet analysis to investigate the coherence of Bitcoin price with the equity markets of both the emerging and developed economies, considering the COVID-19 pandemic and the recent Russia-Ukraine war. The results based on the data from January 9, 2014 to May 31, 2022 reveal that compared with gold, Bitcoin consistently provides diversification opportunities with all six representative market indices examined, specifically under the normal market condition. In particular, for short-term horizons, Bitcoin shows favorably low correlation with each index for all years, whereas exception is observed for gold. In addition, diversification between Bitcoin and gold is demonstrated as well, mainly for short-term investments. However, the diversification benefit is conditional for both Bitcoin and gold under the recent pandemic and war crises. The findings remind investors and portfolio managers planning to incorporate Bitcoin into their portfolios as a diversification tool to be aware of the global geopolitical conditions and other uncertainty in considering their investment tools and durations.
... The introduction and growth of asset and asset classes like cryptocurrencies and Islamic equities have provided avenues for investors to venture into during their search for alternate assets. Contemporary versions of financial crises and the recent COVID-19 pandemic have championed reassessments of the role of these assets and asset classes in portfolio diversification in quest of competing levels of risks and returns (Adam, 2020;Adam et al., 2022;Asafo-Adjei et al., 2021;Baur and Lucey, 2010;Baur and McDermott, 2016;Bekiros et al., 2017;Boateng et al., 2021;Hung, 2019;Habib and Stracca, 2012;Huang et al., 2021;Jiang et al., 2021;Kliber et al., 2019;Mensi et al., 2021;Owusu Junior et al., 2020a;Owusu Junior et al., 2020b;Owusu Junior and Tweneboah, 2020;Yarovaya et al., 2021b). Thus, we could maintain that the intensity of the quest for safe assets heightens during Black Swan conditions and through this search, information flows between financial markets occur more frequently. ...
Purpose
This paper investigates the probable differential impact of the confirmed cases of COVID-19 on the equities markets of G7 and Nordic countries to ascertain possible interdependencies, diversification and safe haven prospects in the era of the COVID-19 pandemic over the short-, intermediate- and long-term horizons.
Design/methodology/approach
The authors apply a unique methodology in a denoised frequency-domain entropy paradigm to the selected equities markets (Li et al . 2020).
Findings
The authors’ findings reinforce the operability of the entrenched market dynamics in the COVID-19 pandemic era. The authors divulge that different approaches to fighting the pandemic do not necessarily drive a change in the deep-rooted fundamentals of the equities market, specifically for the studied markets. Except for an extreme case nearing the end (start) of the short-term (intermediate-term) between Iceland and either Denmark or the US equities, there exists no potential for diversification across the studied markets, which could be ascribed to the degree of integration between these markets.
Practical implications
The authors’ findings suggest that politicians should pay closer attention to stock market fluctuations as well as the count of confirmed COVID-19 cases in their respective countries since these could cause changes to market dynamics in the short-term through investor sentiments.
Originality/value
The authors measure the flow of information from COVID-19 to G7 and Nordic equities using the entropy methodology induced by the Improved Complete Ensemble Empirical Mode Decomposition with Adaptive Noise (ICEEMDAN), which is a data-driven technique. The authors employ a larger sample period as a result of this, which is required to better comprehend the subtleties of investor behaviour within and among economies – G7 and Nordic geographical blocs – which largely employed different approaches to fighting the COVID-19 pandemic. The authors’ focus is on diverging time horizons, and the ICEEMDAN-based entropy would enable us to measure the amount of information conveyed to account for large tails in these nations' equity returns. Furthermore, the authors use a unique type of entropy known as Rényi entropy, which uses suitable weights to discern tailed distributions. The Shannon entropy does not account for the fact that financial assets have fat tails. In a pandemic like COVID-19, these fat tails are very strong, and they must be accounted for.
... Safe haven assets are financial assets that provide hedging benefits during periods of economic or financial crisis (Baur and McDermott, 2016). Such assets are uncorrelated or are negatively correlated with financial crisis or pandemic (Baur and Lucey, 2010). ...
... Safe haven assets are financial assets that provide hedging benefits during periods of economic or financial crisis (Baur and McDermott, 2016). Such assets are uncorrelated or are negatively correlated with financial crisis or pandemic (Baur and Lucey, 2010). ...
Different assets behave differently during different economic situations and investors are constantly searching for safe assets to hold and avoid volatile assets to hedge against risk. The study considered 13 safe haven assets across the world’s largest economies during the COVID-19 pandemic.The GARCH (1,1) and the threshold GARCH models were applied. The results obtained from the model estimation test showed that COVID-19 and oil price had a negative effect on some safe haven assets. International stock has lessvolatility. The result also revealed that crypto currencies (Bitcoin, Tether, Etherium), stocks (Shanghai stock exchange), currencies (US dollars, Swissfranc, and pounds), precious metal (silver) and government securities (T-bondand T-bill) were less volatile but COVID-19 pandemic triggered higher volatility on precious metal (gold) and stocks (S&P500, CAC40)
... It is essential to understand that safe-haven assets are not the same as safe assets because they only act during an economic crisis (Baur & McDermott, 2016). In several different crisis periods, safe-haven assets are also different assets since they can fluctuate depending on market conditions during a crisis (Bredin et al., 2015). ...
The COVID-19 pandemic and the bearish market have led investors to find a safe-haven asset during this financial turbulence. Gold, US Dollar, and Bitcoin traditionally could be safe-haven assets in previous financial crises. However, safe-haven assets are mainly different during each market crash. Therefore, this paper aims to examine gold, US dollars, and Bitcoin as safe-haven assets during the COVID-19 market turmoil in several South East Asian countries such as Indonesia, Malaysia, Singapore, and the Philippines. All variables use daily data time series from January 2020 - September 2020. This study will conduct an empirical analysis using Generalized Autoregressive Conditional Heteroscedasticity (GARCH). Our result shows that during the COVID-19 pandemic, US Dollar could act as a safe-haven asset in Indonesia, Malaysia, and the Philippines. It implies that when the condition is uncertain during a pandemic, many investors switch their investments to US dollars in those three countries. On the other hand, gold and bitcoin are not safe-haven assets, but they could only act as hedging for several countries in South-East Asia.
... Gold is a well-known type of precious metal, which is widely used as jewelry and valuable property because it is soft and malleable. Furthermore, gold has been a popular and trusted investment instrument over time (Hillier et al., 2006;Blose, 2010;Baur and Lucey, 2010;Baur and McDermott, 2010;Hood and Malik, 2013;Reboredo, 2013;Ciner et al., 2013;Areal et al., 2015;Beckmann et al., 2015;O'Connor et al., 2015;Baur and McDermott, 2016;Hoang et al., 2016;Iqbal, 2017;Bekiros et al., 2017;Junttila et al., 2018;Tronzano, 2021). This is consistent with the discovery of Makala and Li (2021) that aside from being a valuable asset, gold is an investment instrument capable of protecting wealth because its value tends to be higher than other precious metals, such as platinum and palladium. ...
Precious metals occur naturally and have a high resistance to corrosion or oxidation. These natural resources are used as investment instruments to protect wealth values, such as gold, silver, and palladium. Price movements need to be understood when investing, and it is achieved through a time series model that predicts future prices. Also, autoregressive fractional integrated moving average (ARFIMA) is used to model price movements with long memory effects, while fuzzy time series Markov chain (FTSMC) is employed for performing numerical approach. It was observed that gold price movement has a long memory effect; therefore, it is eligible to be formed into the ARFIMA model. However, the silver and palladium prices do not contain a long memory effect, which means their movements are only formed through the FTSMC numerical model. The ARFIMA modeling results show that the gold price long memory model has the best accuracy with the smallest error value and also demonstrates excellent goodness of fit. Furthermore, the gold price long memory model movement has long-term stability compared to other precious metals. This provides an investment advantage because it is a stable asset, easy to liquidate in cash, free of interest, has an emergency fund role, and protects wealth’s value.
... In the early 2000s, the U.S. economy was challenged by the bursting of the "dot-com bubble," which led to some huge financial difficulties among powerful companies, and the World Trade Center attacks. That event contributes to the rise in the value of gold, which is highly prized in times of crisis because, it is a safe haven par excellence [20]. Gold is the main asset that every investor, every saver, and every central bank seeks when the economy and finance falter or prediction some economic shocks. ...
Colloidal gold (AuNP) is a molecule obtained from pure gold (Au), and has several uses in the health, industrial, and chemical sectors. There are several processes to generate it and these methods are perfected over time. However, colloidal gold manufacturers and their customers are dependent on the pure gold market, its disruptions, and fluctuations. This paper first shows that the gold market is currently unstable due to the existing pandemic and geopolitical conflicts. The main gold producers, China, Russia, and Australia, together account for more than a quarter of the world’s gold production, and only a few European countries produce gold in small quantities. Europe is therefore forced to import gold, including colloidal gold. Several innovations related to gold nanoparticles are emerging, notably in the miniaturization of industrial components or in the health sector during the pandemic. The objective of this chapter is therefore to understand the patterns into which these countries must fit to produce these particles and the economic, political, and scientific stakeholders involved in capturing these flows. Through the prism of the gold market, the electronics industry, and the health field, this chapter looks at these issues while putting into perspective the salient facts that could impact this market in the years to come.
... Indeed, most researchers have focused on Gold due to its unique features. 2 In particular, several studies have shown that the protection property of gold is present not only against inflation (Lucey et al., 2017;Salisu et al., 2019;Shahbaz et al., 2014;Worthington & Pahlavani, 2007), but also in the face of adverse market movements by serving as a safe haven and/or a hedge in turbulent times, which was evident in the wake of several crises including the 9/11 terrorist attacks, the GFC, and the ongoing COVID-19 pandemic (Akhtaruzzaman, Boubaker, et al., 2021;Baur & Lucey, 2010;Baur & McDermott, 2010;Baur & McDermott, 2016). Nonetheless, the hedging and protection properties of gold are not uniform across markets and sample periods. ...
... Indeed, most researchers have focused on Gold due to its unique features. 2 In particular, several studies have shown that the protection property of gold is present not only against inflation (Lucey et al., 2017;Salisu et al., 2019;Shahbaz et al., 2014;Worthington & Pahlavani, 2007), but also in the face of adverse market movements by serving as a safe haven and/or a hedge in turbulent times, which was evident in the wake of several crises including the 9/11 terrorist attacks, the GFC, and the ongoing COVID-19 pandemic (Akhtaruzzaman, Boubaker, et al., 2021;Baur & Lucey, 2010;Baur & McDermott, 2010;Baur & McDermott, 2016). Nonetheless, the hedging and protection properties of gold are not uniform across markets and sample periods. ...
This paper investigates the potential hedging and safe-haven properties of several alternative investment assets, including gold, Bitcoin, oil, and the oil price volatility index (OVX), against the risks of the Saudi stock market and its constituent sectors in different phases of the COVID-19 pandemic. Using daily data, we employ the bivariate dynamic conditional correlation-generalized autoregressive conditional heteroskedasticity (DCC-GARCH) technique to model volatilities and conditional correlations. Our findings show that all investigated alternative investment assets had a time-varying hedging role in the Saudi stock market, which became expensive during the early stages of the COVID-19 pandemic. Our results also show that the optimal weights for gold were substantially higher than those of other assets, reaching a peak during the pandemic, implying that investors consider gold a flight-to-safety asset. Additionally, we find that gold and OVX were strong hedges and could have served as weak safe havens for investors during the early stages of the COVID-19 pandemic, while the remaining assets generally lacked these properties and could be merely used as diversifiers. Our empirical findings offer several key implications for policymakers and portfolio managers in Saudi Arabia that may be applicable to similar markets. In particular, we show that OVX-based products can serve as a promising hedging asset for stock markets in oil-exporting countries.
... Facing unprecedented risks in the markets, people feel an increasing need to make secure investments. The study reported in [23] presented evidence that gold was a safe investment in times of post-political and financial crises. Gold is preferable to other types of assets generally considered secure due to the behavioral prejudices associated with gold's history as a commodity-a product of constant value and a secure investment. ...
The focus of this study was the design and development of a web-based application for the assessment of gold during the COVID-19 pandemic known as Cov_iGold. The pandemic had clear and serious consequences for the global economy due to the stringent quarantine guidelines introduced which led to economic activities becoming dormant. Despite the extreme restrictions on operations and face-to-face transactions, there is still a demand for gold. As the global market has been widely affected, this platform is expected to provide a general tool to meet the demands of gold collectors and merchants. It is a self-exploratory application, through which users will be able to gain daily access to gold-related information, e.g., current prices, gold market trends and the selling and purchasing of gold with added features. This tool was developed according to five stages of the Systems Development Life Cycle (SLDC), namely, planning, analysis, design, implementation and maintenance. Gold merchants can easily track their buyers, receive payment hassle-free and effectively manage large numbers of buyer-related data in one repository. With these significant functions, inaccuracies in data will be reduced or eliminated. Having these resources at their fingertips, Cov_iGold users will be able to fully optimize its features from the comfort of their own homes.
... Implications may also be related to the construction of portfolios. For example, XAU is still among the top allocations of safe havens (Baur & McDermott, 2016;Elie et al., 2019;Ji et al., 2020) in hedging risky assets such as the equity shares. If only safe haven assets were available to further mitigate risks of the idiosyncratic volatility of XAU, oil futures may be a more appropriate choice over currencies. ...
The vector autoregressive (VAR) model has been popularly employed in operational practice to study multivariate time series. Despite its usefulness in providing associated metrics such as the impulse response function (IRF) and forecast error variance decomposition (FEVD), the traditional VAR model estimated via the usual ordinary least squares is vulnerable to outliers. To handle potential outliers in multivariate time series, this paper investigates two robust estimation methods of the VAR model, the reweighted multivariate least trimmed squares and the multivariate MM-estimation. The robust information criteria are also proposed to select the appropriate number of temporal lags. Via extensive simulation studies, we show that the robust VAR models lead to much more accurate estimates than the original VAR in the presence of outliers. Our empirical results include logged daily realized volatilities of six common safe haven assets: futures of gold, silver, Brent oil and West Texas Intermediate (WTI) oil and currencies of Swiss Francs and Japanese Yen. Our sample covers July 2017–June 2020, which includes the history-writing price drop of WTI on April 20, 2020. Our baseline results suggest that the traditional VAR model may significantly overestimate some parameters, as well as IRF and FEVD metrics. In contrast, robust VAR models provide more reliable results, the validity of which is verified via various approaches. Empirical implications based on robust estimates are further illustrated.
... Perbedaan safe haven dan hedge pada periode waktunya. Hedge memiliki//jangka/waktu lebih lama/daripada//safe haven (Baur & McDermott, 2016). ...
Penelitian ini untuk mengetahui pengaruh harga emas dari masing masing negara IMT-GT, harga minyak dunia Brent serta harga minyak dunia WTI terhadap harga saham masing masing negara IMT-GT era Covid-19 dari 11 maret 2020- 25 maret 2022. Penelitian menggunakan menggunakan pendekatan kuantitatif dengan analisis deskriptif dan analisis multivariat SEM-PLS dengan aplikasi WarpPLS 8.0. Penelitian menghasilkan Harga emas Thailand dan Indonesia tidak berpengaruh terhadap harga saham SET dan IHSG. Sedangkan Malaysia berpengaruh positif terhadap harga saham KLSE. Harga minyak Brent Thailand dan Indonesia berpengaruh positif terhadap harga saham SET dan IHSG. Sedangkan Harga minyak Brent Malaysia tidak berpengaruh terhadap harga saham KLSE. Harga minyak WTI Malaysia dan Indonesia berpengaruh negatif terhadap harga saham KLSE dan IHSG. Sedangkan Thailand berpengaruh positif terhadap harga saham SET
... As a recognized hard currency in precious metals, gold is a reserve asset during periods of economic stability and a hedging tool during periods of economic anomalies. In other words, it is sensitive to the impact of external emergencies (3). During the spread of the epidemic, the international gold price rose. ...
The outbreak of the COVID-19 epidemic intensified the volatility of commodity markets (the energy and precious metals markets), which created a significant negative impact on the volatility spillovers among these markets. It may also have triggered a new volatility risk contagion. In this paper, we introduce the DCC-GARCH-CONNECTEDNESS approach to explore the volatility spillover level and multi-level spillover structure characteristics among the commodity markets before and during the COVID-19 epidemic in order to clarify the new volatility risk contagion patterns across the markets. The results implied several conclusions. (i) The COVID-19 epidemic has significantly improved the total volatility spillover level of the energy and precious metals markets and has enhanced the risk connectivity among the markets. (ii) The COVID-19 epidemic has amplified the volatility of the crude oil market, making it the main volatility spillover market, namely the source of volatility risk contagion. (iii) The COVID-19 epidemic outbreak enhanced the external risk absorption capacity of the natural gas and silver markets, and the absorption level of the external volatility spillover improved significantly. Furthermore, the risk absorption capacity of the gold market weakened, while the gold market has remained the endpoint of external volatility risk during the epidemic and has acted as a risk stabilizer. (iv) The volatility spillover among markets has clear time-varying characteristics and a positive connectedness with the severity of the COVID-19 epidemic. As the severity of the COVID-19 epidemic increases, the volatility risk connectivity among the markets rapidly increases.
... Gold as a hedge and safe haven has been studied [43][44][45]. In comparison studies between gold and cryptocurrencies, Bitcoin was the focus in most studies [39,[46][47][48][49][50]. ...
Our investigation strives to unearth the best portfolio hedging strategy for the G7 stock indices through Bitcoin and gold using daily data relevant to the period 2 January 2016 to 5 January 2023. This study uses the DVECH-GARCH model to model dynamic correlation and then compute optimal hedge ratios and hedging effectiveness. The empirical findings show that Bitcoin and gold were rather effective hedge assets before COVID-19 and diversifiers during the pandemic and the Russia-Ukraine war. From hedging effectiveness perspectives, gold and Bitcoin are safe-haven assets, and the investment risk of G7 stock indices could be hedged by taking a short position during the pandemic period and war except for the pair Nikkei/Gold. Additionally, gold beats Bitcoin in terms of hedging efficiency. We thus demonstrate the central role of Bitcoin and gold as financial market participants, particularly during market turmoil and downward movements. Our findings can be of interest to investors, regulators, and governments to take into consideration the role of Bitcoin in financial markets.
This paper investigates the tail behavior patterns of commodity assets, the risk exposure of these assets, and how they rank given their safe haven properties. We use state-of-the-art dynamic generalized autoregressive score models to jointly estimate tail risk measures for ten commodity assets (aluminum, copper, crude oil, gasoline, gold, heating oil, lead, soybeans, tin, and wheat) over the period from September 14, 2011 to June 30, 2021. Our in-sample findings suggest that aluminum outperforms gold as a safe haven in both pre- and COVID-19 times. The out-of-sample results confirm that aluminum retains its leading role during the COVID-19 pandemic. These findings bear implications for constructing well-diversified portfolios which is vital for investors, portfolio managers, and financial advisors, and for policymakers to design policies that ensure financial stability during periods of market turmoil, such as the COVID-19 pandemic.
This paper empirically assesses the ability of three putative stablecoins (two dollar-backed, Tether and USD Coin; and one gold-backed, Digix Gold) to mitigate the risk of facing severe losses (downside risk) of a traditional cryptocurrency portfolio. There are institutional features that induce cryptoinvestors to use stablecoins as diversifiers instead of withdrawing dollars or adding assets traditionally considered as safe havens, such as gold, crude oil, etc. Stablecoins, however, are not as stable as their name and collateralized peg suggest. A monthly rebalance experiment is conducted over an out-of-sample period considering higher order conditional moments when dynamically measuring the tail risk of cryptocurrency portfolios. The empirical evidence shows that the low conditional correlations of dollar-backed stablecoins with cryptocurrency portfolios make them particularly suitable as a hedge for crypto investors. It also shows that all stablecoins considered have high diversification capacities by systematically reducing portfolio tail risk.
Cryptocurrency markets have experienced large growth in recent years, with an increase in the number and diversity of traded assets. Previous work has addressed the economic properties of Bitcoin with regards to its hedging or diversification properties. However, the surge of many alternatives, applications, and decentralized finance services on a variety of blockchain networks requires a re-examination of those properties, including indexes from outside the big economies and the inclusion of a variety of cryptocurrencies. In this paper, we report the results of studying the most representative cryptocurrency of each consensus mechanism by trading volume, forming a list of twenty-four cryptocurrencies from the 1st of January 2018 to the 30th of September 2022. Using the Baur and McDermott model, we examine hedge, safe haven, and diversifier properties of all assets for all G7 country’s major indexes as well as all BRICS major indexes breaking it down by two attributes: kind of blockchain technology and pre/during COVID health crisis. Results show that both attributes play an important role in the hedge, safe haven, and diversifier properties associated with the asset. Concretely: stablecoins appear to be the only ones to maintain hedge property in most analyzed markets pre- and during-COVID; Bitcoin investment properties shifted after the COVID crisis started; China and Russia stopped being correlated with the cryptocurrency after the COVID crisis hit.
Blockchain is a permanent, tamper-proof, distributed and historicized accounting register that makes it possible to establish trust between agents, without the intervention of a third party. By its structure, the Blockchain is a disruptive tool intended to “increase the transparency and efficiency of financial markets” (BRI, 2017). Thus this thesis proposes to analyze whether the Blockchain keeps itspromises through the analysis of some of its applications. The first application of Blockchain is Bitcoin. This asset has contributed enormously to the notoriety of Blockchain, on the one hand because of its strong price variations and on the other hand its usefulness in a financial portfolio. Since the increase of the transactions on Bitcoin network and by extension its price in 2012, determining its fundamentals has become a crucial question. The first chapter therefore analyzes the various determinants of Bitcoin price set out in the existing literature (the number of searches on Google, the difficulty of mining Bitcoin, the prices of gold and oil, the number of Bitcoins in circulation, etc. ) to which are associated the volumes of three crypto-assets which have the particularity of being largely (or totally) owned by their inventors: Tether, Ethereum and Ripple. Another question raised by the advent of crypto-assets is their usefulness in a financial portfolio. In the second chapter, we analyze the properties of hedging and diversification assets of crypto-assets for some African stock market indices. We compare crypto-assets to other assets traditionally used as safe-havens (gold, US Treasury bonds and commodities). Finally in the third chapter we test the safe haven qualities of crypto-assets during Covid-19 crisis through the analysis of European and African stock markets and then the establishment of vaccination campaigns.
A search for a safe haven inspired by investors' loss aversion significantly exacerbates in times of turbulence. The same happened during the crisis of Covid-19 when recurring losses forced investors to alter their investment strategies, and the search for alternative investment classes picked momentum. This study evaluates the safe haven properties of Green financial products, Islamic assets, and Cryptocurrencies, which gained prominence in financial markets after the global financial crisis, coupled with the long-acknowledged safe haven assets like Gold, Silver, and Treasuries. We employ a quantile VAR framework to examine the connectedness between the assets' markets during stressed, normal, and euphoric periods. Our results show that both Green and Islamic Bonds only act as a safe haven during the normal market condition; however, US Treasury, cryptocurrencies, and gold emerged as safe-haven assets under bearish or extreme volatility periods. While proclivity towards US Treasury and gold supports the phenomenon of flight-to-safety, we find cryptos have also become investors' preference amid bearish trends finding their way into the list of safe havens for investors.
The COVID-19 pandemic has led to extensive news coverage, causing investor sentiment to swing, which has further increased financial market price volatility. There is an increasing need to find a hedge against sentiment risk. This paper examines the hedge capabilities of gold and Bitcoin against COVID-19-related news sentiment (CNS) risk under a nonlinear autoregressive distributed lag (NARDL) model. Our empirical results reveal that there is an obvious asymmetric effect from the CNS on gold prices in the short run and that the decrease in the COVID-19-related news index would have a greater impact on gold prices than when it increases. The impact of CNS on Bitcoin prices is asymmetric in the long and short term, especially in the long term. In addition, we conclude that gold is a hedge against CNS risk in the long term, and the hedging effect of Bitcoin is mainly reflected in the short-term.
For the purpose of optimizing an investment portfolio in the Indian market, this research provides an understanding of the connectedness, volatility transmission and investment scenario between different pairs of commodity futures and assets, observing the impact of Covid-19. To do that, we derived a daily dataset spanning from 2016 to 2021 bifurcated into two panels comprising the pre & post-Covid-19 onset periods. First, we employed wavelet coherence plots to check the directional connectedness between asset and commodity futures. The DCC-GARCH model was then applied on both the data panels to investigate and compare volatility transmission. Hedge ratios and optimum portfolio weights have been estimated to demonstrate a comparative investment scenario. We observe a significant long-term volatility transmission from the asset markets to commodity futures for both the onset panel. Commodity futures provide effective hedging and diversification efficiency against the asset markets. DCC, hedge ratio and optimum portfolio weights show the heterogeneous patterns of investment for pre & post-Covid-19 period. Gold, bond, bullion futures and exchange rates are recognized as a gauge of the economy in crisis. This work will provide significant insight to readers about portfolio construction and required changes in portfolio weights in normal and crisis market conditions.
Recent literature extensively studies the safe-haven properties of different asset classes in crisis periods. The magnitude of the economic policy uncertainty index (EPU) and the geopolitical risk (GPR) increases significantly during extreme crisis periods such as covid crisis, but the earlier literature ignores how both risk measures impact on different asset classes during severe economic downturns. In this paper, we contribute by examining the hedging and safe-haven properties of gold, oil, equities, and foreign exchange rates against the United States (US) EPU and GPR by utilizing OLS regression, quantile regression and the quantile connectedness approach for pre-covid (October 1, 2013–March 10, 2020) and post-covid data (March 11, 2020–August 27, 2021). OLS results suggest that only the stock market has positive risk premium for both uncertainty measures. With quantile regression analysis for the pre-covid period, we find that asset returns provide no hedge (hedge) across bearish (bullish) market conditions. Importantly, safe-haven properties suggest that gold is a safe-haven asset at the extreme stress condition (at higher level of USEPU shocks). Other assets also exhibit safe-haven characteristics during extreme uncertain periods with heterogeneity in safe-haven effectiveness across bearish to bullish markets. With the post-covid data, we show that S&P500 stocks and EURO hedge EPU and GPR in bullish market condition, while Oil, S&P500, Great Britain Pound, EURO, Japanese Yen display safe-haven properties at the 99% quantile of USEPU. Specifically, gold lost its safe-haven features during covid. Interestingly, results from quantile connectedness suggest that selected asset returns have the potential to diversify against uncertainty measures considering low volatility transmissions between them across the lower and higher quantiles. Our findings are important for investors and asset managers who aim to hedge EPU and GPR during the stress period.
The prevalence of uncertainty is evident in natural resources and financial markets almost every period. However, the global financial crisis and the recent Covid-19 pandemic is considered the most distressful event that disturbs the global economic and financial performance. In such crises, natural resource (mineral) prices also fluctuate as a result of demand and supply shocks. Identifying volatility in metallic resource prices is now the time's need, which consequently leads to implementing appropriate policies for recovery of the global markets. In this sense, the current study analyzed these two period from August 21, 2007, to December 31, 2009 (global financial crisis) and from January 01, 2019, to September 17, 2021 (Covid-19 pandemic). The empirical results obtained via threshold generalized autoregressive conditional heteroscedasticity (TGARCH) and exponential autoregressive conditional heteroscedasticity (EGARCH) model asserted that volatility exists in metallic resource prices in both the crises periods. Concerning the the global financial cristhe metallic resource prices were more volatile in 2008, while such priwere are highly volatile during the Covid-19 pandemic peak year (2020). Additionally, volatility in metallic resources is found higher in the Covid-19 pandemic, relative to global financial crisis. Based on the empirical results, this study suggests the appropriate policy measures that could help tackle the issue of metallic resource price volatility.
Purpose
The purpose of this paper is to analyze the hedging capacity of Bitcoin in relation to the S&P 500 index during the COVID-19 pandemic.
Design/methodology/approach
In order to investigate the hedging features of Bitcoin in relation to the S&P 500 index during the COVID-19 pandemic, the authors use the Granger causality applied on a daily sample of observations ranging from January 1st, 2019 to December 31st, 2020. As robustness checks, the authors use autoregressive models to test the validity of the findings.
Findings
Using time series of daily data from 1st January 2019 to 31st December 2020, the results show that Bitcoin is not considered as a safe haven because it moves at the same pace as the S&P 500. As a robustness check, the authors use the exponential GARCH model and confirm our previous findings. Overall, the study contributes to the debate on both COVID-19's impact on financial systems and the hypothesis of Bitcoin being a safe haven during extreme global crises.
Originality/value
The study contributes to the debate on both COVID-19's impact on financial systems and the hypothesis of Bitcoin being a safe haven during extreme global crises.
In the digital era, there are many investable assets and make profit from it. Because investments always have risk, the investors then decrease their risk by finding assets that are expected to retain or increase in their values during times of market turbulence. Herein the assets which can retain or increase in their values will be called as safe-haven assets. Gold has been known as the safe-haven asset, however cryptocurrency is a class of digital assets which is claimed as the new gold in the digital era. Consequently, this study aims to answer a question “Can cryptocurrency be a new safe-haven?”.
We study high-frequency exchange rates over the period 1993–2008. Based on the recent literature on volatility and liquidity
risk premia, we use a factor model to capture linear and non-linear linkages between currencies, stock and bond markets as
well as proxies for market volatility and liquidity. We document that the Swiss franc and Japanese yen appreciate against
the US dollar when US stock prices decrease and US bond prices and FX volatility increase. These safe haven properties materialise
over different time granularities (from a few hours to several days) and non-linearly with the volatility factor and during
crises. The latter effects were particularly discernible for the yen during the recent financial crisis.
Years of research show that stress influences cognition. Most of this research has focused on how stress affects memory and the hippocampus. However, stress impacts other regions involved in cognitive and emotional processing, including the prefrontal cortex, striatum, and insula. New research examining how stress affects decision processes reveals two consistent findings. First, acute stress enhances selection of previously rewarding outcomes but impairs selection of previously negative outcomes, possibly due to stress-induced changes in dopamine in reward-processing brain regions. Second, stress amplifies gender differences in strategies during risky decisions, with males taking more risk and females less risk under stress. These gender differences in behavior are associated with differences in activity in the insula and dorsal striatum, brain regions involved in computing risk and preparing to take action.
Much of the current debate on reforming the international financial architecture is aimed at reducing the risks of contagion--best defined as a significant increase in cross-market linkages after a shock to an individual country (or group of countries). This definition highlights the importance of other links through which shocks are normally transmitted, including trade and finance. During times of crisis, the ways in which shocks are transmitted do seem to differ, and these differences appear to be important. Empirical work has helped to identify the types of links and other macroeconomic conditions that can make a country vulnerable to contagion during crisis periods, although less is known about the importance of microeconomic considerations and institutional factors in propagating shocks. Empirical research has helped to identify those countries that are at risk of contagion as well as some, albeit quite general, policy interventions that can reduce risks. Copyright 2000 by Oxford University Press.
This paper examines how ambiguity aversion and funding liquidity affect market dynamics when a large strategic trader is forced to liquidate. More specifically, the paper explores how ambiguity over an asset's value affects liquidation dynamics when ambiguity-averse traders follow maxmin utility. I also present the joint effects of ambiguity and limited funding liquidity on this liquidation process. The findings reveal that the presence of ambiguity leads to the emergence of a ‘no-trade region.’ This lack of trading activity under ambiguity becomes more prominent as the ambiguous support widens, and interestingly, as the initial wealth of the distressed strategic trader increases.
We examine whether time variation in the comovements of daily stock and Treasury bond returns can be linked to measures of stock market certainty, specifically the implied volatility from equity index options and detrended stock turnover. From a forward-looking perspective, we find a negative relation between the uncertainty measures and the future correlation of stock and bond returns. Contemporaneously, we find that bond returns tend to be high (low), relative to stock returns, during days when implied volatility increases (decreases) substantially and during days when stock turnover is unexpectedly high (low). Our findings suggest that stock market uncertainty has important cross-market pricing influences and that stock-bond diversification benefits increase with stock market uncertainty.
This paper provides a broad analysis of the effect of the current financial crisis on global equity markets and their major components. We also examine the magnitude of the crisis in terms of value destruction in comparison to other market crashes. In brief, upon looking at return performance across an array of regions, countries, and sectors, broad market averages are down approximately 40% on their end of 2006 levels. While deterioration started in most markets in early to mid 2008, the crisis period of mid-September to the end of October 2008 is responsible for the lion's share of the collapse with just about all indices falling 30–40% in this short period. Financial sectors have taken a bigger hit than non-financials over the period, though they both suffered similarly during the peak of the crisis. Due to larger rises in 2007 the emerging markets drop more in 2008 than developed markets but in large part end up at the same level as the other markets. The global nature of the crisis is also apparent from the high correlations between markets and investment styles that further increased during the crisis. As a result, diversification provided little help to investors when needed most as markets dropped in tandem.
We assess the impact of safe haven flows on market liquidity by examining the bid-ask spread in the Euro–U.S. dollar spot and forward markets around Y2K. In the months preceding December 1999, it was widely believed that the U.S. was the best prepared for Y2K and funds would flow into U.S. assets. Intraday spot and forward spreads widen in December 1999 and stay wide through January 2000, well after the resolution of Y2K-related uncertainty. Daily spreads widen for one, three and six-month forwards maturing in January 2000. The explanation most consistent with these results is that Y2K-driven safe haven flows affect dealers' inventory positions and thereby market liquidity.
A striking and unexpected feature of the financial crisis has been the sharp appreciation of the US dollar against virtually all currencies globally. The paper finds that negative US-specific macroeconomic shocks during the crisis have triggered a significant strengthening of the US dollar, rather than a weakening. Macroeconomic fundamentals and financial exposure of individual countries are found to have played a key role in the transmission process of US shocks: in particular countries with low FX reserves, weak current account positions and high direct financial exposure vis-à-vis the United States have experienced substantially larger currency depreciations during the crisis overall, and to US shocks in particular.
"This paper analyses the effect of an increase in market-wide uncertainty on information flow and asset price comovements. We use the daily realised volatility of the 30-year treasury bond futures to assess macroeconomic shocks that affect market-wide uncertainty. We use the ratio of a stock's idiosyncratic realised volatility with respect to the S&P500 futures relative to its total realised volatility to capture the asset price comovement with the market. We find that market volatility and the comovement of individual stocks with the market increase contemporaneously with the arrival of market-wide macroeconomic shocks, but decrease significantly in the following five trading days. This pattern supports the hypothesis that investors shift their (limited) attention to processing market-level information following an increase in market-wide uncertainty and then subsequently divert their attention back to asset-specific information". Copyright 2007 The Authors Journal compilation (c) 2007 Blackwell Publishing Ltd.
We present a model of intuitive inference, called “local thinking,” in which an agent combines data received from the external
world with information retrieved from memory to evaluate a hypothesis. In this model, selected and limited recall of information
follows a version of the representativeness heuristic. The model can account for some of the evidence on judgment biases,
including conjunction and disjunction fallacies, but also for several anomalies related to demand for insurance.
This study tested the proposition that deficient decision making under stress is due, to a significant extent, to the individual's failure to fulfill adequately an elementary requirement of the decision-making process, that is, the systematic consideration of all relevant alternatives. One hundred one undergraduate students (59 women and 42 men), aged 20-40, served as subjects in this experiment. They were requested to solve decision problems, using an interactive computer paradigm, while being exposed to controllable stress, uncontrollable stress, or no stress at all. There was no time constraint for the performance of the task. The controllability of the stressor was found to have no effect on the participants' performance. However, those who were exposed to either controllable or uncontrollable stress showed a significantly stronger tendency to offer solutions before all available alternatives had been considered and to scan their alternatives in a nonsystematic fashion than did participants who were not exposed to stress. In addition, patterns of alternative scanning were found to be correlated with the correctness of solutions to decision problems.
Uncertainty appears to jump up after major shocks like the Cuban Missile crisis, the assassination of JFK, the OPEC I oil-price shock and the 9/11 terrorist attack. This paper offers a structural framework to analyze the impact of these uncertainty shocks. I build a model with a time varying second moment, which is numerically solved and estimated using firm level data. The parameterized model is then used to simulate a macro uncertainty shock, which produces a rapid drop and rebound in aggregate output and employment. This occurs because higher uncertainty causes firms to temporarily pause their investment and hiring. Productivity growth also falls because this pause in activity freezes reallocation across units. In the medium term the increased volatility from the shock induces an overshoot in output, employment and productivity. Thus, second moment shocks generate short sharp recessions and recoveries. This simulated impact of an uncertainty shock is compared to VAR estimations on actual data, showing a good match in both magnitude and timing. The paper also jointly estimates labor and capital convex and non-convex adjustment costs. Ignoring capital adjustment costs is shown to lead to substantial bias while ignoring labor adjustment costs does not.
This paper addresses two questions. First, we investigate whether gold is a hedge against stocks and/or bonds and second, we investigate whether gold is a safe haven for investors if either stocks or bonds fall. A safe haven is defined as a security that loses none of its value in case of a market crash. This is counterpoised against a hedge, defined as a security that does not co-move 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 prices and returns and their relationship with the Gold price. We find that (i) Gold is a hedge against stocks, (ii) Gold is a safe haven in extreme stock market conditions and (iii) Gold is a safe haven for stocks only for 15 trading days after an extreme shock occurred.
When ambiguity-averse investors process news of uncertain quality, they act as if they take a worst-case assessment of quality. As a result, they react more strongly to bad news than to good news. They also dislike assets for which information quality is poor, especially when the underlying fundamentals are volatile. These effects induce ambiguity premia that depend on idiosyncratic risk in fundamentals as well as skewness in returns. Moreover, shocks to information quality can have persistent negative effects on prices even if fundamentals do not change. Copyright 2008 by The American Finance Association.