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Gold and Inflation in Canada: A Time-Varying Perspective
Abstract
This study purposes of investigating the roles of gold as a hedge or a safe haven against inflation in Canada. We utilize the standard and quantile techniques in the volatility models, with the time-varying conditional variance of the regression residuals based on the TGARCH descriptions. We found that gold only plays a minor role as a hedge and safe haven against inflation since their returns do not evolve with the same rhythm as inflation. The rolling regression analysis, on the other hand, demonstrates that the incidents of refuge against purchasing power loss only occasionally occur at different times and not consistently across holding periods. These findings indicate that gold does not have the ability to secure Canadian investment during high inflationary periods and at all the time. Thus, Canadian investors should hold a well-diversified portfolio to earn sustainable return and protection from purchasing power loss.
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The hedging property of gold against single asset has been greatly demonstrated in literature. Gold-stock hedge suggests gold as ‘safe haven’ for stock market. Unlike gold-stock hedge which requires zero or negative correlation between their returns, gold-inflation hedge refers to the positive co-movement or ’peg’ between gold return and inflation. Thus, this is the first paper to address whether gold can hedge stock market and inflation simultaneously since stock market boom often comes with moderate inflation which creates puzzle in gold price dynamics and its hedging property. In this paper, we assume that an investor creates optimal portfolios from stock and gold. The weights assigned to gold are interpreted as hedge coefficient towards the stock market. We ask if the hedge coefficient also moves in tandem with inflation or other functions of inflation. When regressing the hedge coefficient on inflation or functions of inflation, the slope will be positive if the gold first used to hedge the stock market can also hedge inflation. We find that is not the case: the coefficient is not positive in statistics. This result implies that gold fails to hedge both stock market and inflation simultaneously over time.
This study aims to analyze the characteristics of gold as a diversifier, a hedge or a safe haven against the stock market collapse in five countries. We propose the standard TGARCH and quantile technique in the TGARCH frameworks. Gold exhibits considerable evidence of the strong hedge in India and the US, and diversified role in China. With regards to its role as a safe haven, gold retains its status as a key investment particularly in a country where gold has a preeminent cultural role, i.e., India, as well as in the US and the UK. On the other hand, gold only plays a minor role in emerging markets like in Malaysia. Therefore, investors in India and the US can use gold to protect against losses in the stock market at all times, while in the UK, gold is only viewed as a profitable asset to own during the stock market collapse. Contrariwise, Chinese investors should hold a well-diversified portfolio to earn sustainable returns and offer protection against the stock market collapse. We conclude that the recent worldwide financial crises have increased the investment demand for gold in over the last seventeen years at least.
This research aims to analyse the roles of gold as a hedge or safe haven against stock and inflation, simultaneously. The standard TGARCH and quantile techniques in the TGARCH models are proposed. Based on the standard TGARCH model, this study demonstrates that gold generally displays little evidence of a strong hedge property against the stock market and inflation in the full sample (2001-2014). Nevertheless, this study reports some strong hedging roles for local gold (but not international gold) in the shorter sample (2010-2014) during the period during which particular attention was given to the European debt crisis. For the quantile relations, although we can detect some evidence of a strong safe haven in some quantiles, gold, at best, tends to be a weak safe haven during extreme movements in stock return, for both periods. Concerning gold-inflation relationships, this study reveals that gold, at best, is a less viable haven instrument. This study also reveals that various types of gold are essential to determine the hedge and safe haven effects, while gold in various weights only plays a minor role. In conclusion, these results demonstrate that gold only plays a minor role during stock market slumps and inflationary episodes in the context of Malaysia.
Due to its unique nature, gold has always been regarded as a safe asset. A drastic shift in recent years towards investment demand from jewellery demand reflects the concept that gold can be considered a safe haven asset in times of economic turmoil since investors construct their portfolios to include more gold as an alternative to riskier assets. This paper demonstrates the relevant theoretical dimensions of the gold investment during financial crises. Specifically, we exhibit how investor behaviour has the potential to support the safe haven property of gold. Evidence from this study shows that behavioural finance theories provide valuable contributions, and can aid in improving the understanding and the ability to make better decisions.
Gold and Indian culture have been sharing an age-old association. India is one of the top two consumers of gold. Gold is the most popular investment avenue because of its ability to provide liquidity. The average monthly price however has grown by 1,588 percent over the whole period from 1979 to 2017 (June). In this article, we intend to investigate gold as an investment to hedge against inflation. The sample period to study the relationship between gold and inflation is 2011–2017 (March). To analyze long-run equilibrium between gold and inflation (consumer price index [CPI]), Johansen’s cointegration approach has been used. The short- and long-run causality between gold and inflation has been studied using vector error correction model (VECM) and Wald test. The results of cointegration indicate that gold and CPI series are cointegrated and bear long-run equilibrium. Both VECM and Wald test results indicate that there is only long-run causality between CPI and gold prices. However, in short run these variables do not show any causality. Thus, we infer that gold investment can be used as hedge against Inflation. The findings of this research have got direct implications for retail investors, portfolio managers, treasury and fund managers, government, and commercial traders. © 2018 K.J. Somaiya Institute of Management Studies and Research.
Using the Malaysian monthly domestic gold and consumer price index (CPI), we examine the relationship between gold return and inflation in Malaysia via correlation coefficients and linear regression model. This paper finds no significant relationship between gold return and inflation, gold return and expected inflation and gold return with unexpected inflation, which led to the conclusion that domestic gold is not a good hedge against inflation in Malaysia. It is also not an excellent store of value over a relatively short period of time as it is unable to retain its sustainable purchasing power.
Using daily data, we examine the impact of consumer price index (CPI) releases on gold market returns and volatility in an emerging, high-inflation econo - my, Turkey. We find that the Istanbul Gold Exchange (IGE) does not respond signif - icantly to the release of the CPI news, indicating that the market is not a good hedge against inflation. We also examine the response of the gold market to other public information arrival critical to Turkish economy, such as GNP, balance of trade and tourism. The gold market reacts to public information arrival about GNP and bal - ance of trade, suggesting that real sector news has important effects on the market. Implications of these findings for market participants are discussed.
We examine the case for gold as a long-term or strategic asset allocation for European professional investors. The role of gold in asset management is currently very topical. From a longer term perspective a wide consensus exists that gold is a useful hedge against inflation and a long-term store of financial value.
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 subject 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. Yes Yes
This paper attempts to reconcile an apparent contradiction between short-run and long-run movements in the price of gold. The theoretical model suggests a set of conditions under which the price of gold rises over time at the general rate of inflation and hence be an effective hedge against inflation. The model also demonstrates that short-run changes in the gold lease rate, the real interest rate, convenience yield, default risk, the covariance of gold returns with other assets and the dollar/world exchange rate can disturb this equilibrium relationship and generate short-run price volatility. Using monthly gold price data (1976–1999), and cointegration regression techniques, an empirical analysis confirms the central hypotheses of the theoretical model.
This study is a comparative analysis of inflation hedging properties of stocks, gold and real estates for the US. It is hypothesised that the assets have varying market characteristics and thus should respond differently to high inflation. The Fisher's hypothesis for asset-inflation hedging is constructed both within the bivariate and multi-variate modelling frameworks. Thereafter, some salient features typical of predictive models such as asymmetry , time-variation and structural breaks are incorporated in the estimation process for completeness. The results show that inflation hedging tendencies of assets are heterogeneous across the considered assets. The real estates and stocks prove to be good hedges against inflation, while gold investment defies Fisher's hypothesis. Also, the results are sensitive to the decomposition of data for pre-and post-GFC periods, indicating that asset-inflation hedging relationship for the US is time-varying. The results are robust to alternative data frequencies.
Cambridge Core - Econometrics and Mathematical Methods - Introductory Econometrics for Finance - by Chris Brooks
This paper aims to study the role of gold as a hedge against inflation based on local monthly gold prices in China, India, Japan, France, the United Kingdom and the United States of America in periods ranging from 1955 to 2015. We extend the literature by using a novel approach with the nonlinear autoregressive distributed lags (NARDL) model (Shin et al., 2014). The main advantage of this model relies on its ability to simultaneously capture the short- and long-run asymmetries through positive and negative partial sum decompositions of changes in the independent variable(s). Moreover, we rely on local gold prices instead of those from London converted into local currencies like in most of previous studies. The results show that gold is not a hedge against inflation in the long run in all cases. In the short run, gold is an inflation hedge only in the UK, USA, and India. Furthermore, there is no long-run equilibrium between gold prices and the CPI in China, India and France. This difference may be due to traditional aspects of gold and custom controls for gold trade in these countries. Our robustness check suggests that the data time-frequency does not change the specification of the NARDL model but can change conclusions regarding the role of gold as a hedge against inflation in certain countries.
This paper conducts a comprehensive empirical study of hedging potential of gold against adverse movements of stock prices, inflation and exchange rate for India, Pakistan and the United States. Using daily and monthly data covering the period of 1990 to 2013, this paper first explains the average gold returns using an EGARCH model. The paper also investigates whether hedging potential of gold remains equally strong in several bearish and bullish conditions of gold market using a quantile regression approach. It was found that there is a fairly robust evidence of gold acting as a safe haven against exchange rate risk in Pakistan and India. However, the evidence of gold hedging stock market risk is not uniformly strong in varying gold market conditions in the three countries. Also the evidence that gold hedges inflation risk in the US is realized only during the average and bearish conditions of gold market but not during bullish trends. The paper found robust evidence of gold acting as a safe haven against deteriorating local currency in Pakistan using daily data. The hedging and safe have benefit of gold against currency risk is also fairly strong in India as evidenced in the daily data. Thus, the empirical findings of gold acting as either a hedge or a safe haven against the risks in other asset markets need some qualification pertaining to the gold market condition itself.
In this article, we give an overview of the state of scientific knowledge on inflation hedging. Specifically, we distill the results of several decades of research analysing the relationship between major asset classes (common stocks, gold, fixed income securities, real estate) and inflation. Even though previous studies have brought forth important facts characterising the interplay of asset returns and inflation rates (e.g., time-dependency, asymmetry, outlier-sensitivity and a tendency towards long-term but limited short-term inflation protection), there is still no consensus on the subject because sample, data and methodology issues preclude strict comparison of most studies. Thus, from a synthesis of the insights gained from our review, we also outline possible directions for future research that may help to establish consensus among researchers.
contagion captures the co-incidence of extreme return shocks across countries within a region the extent of contagion, its economic significance, and its determinants using a multinomial 1990s, we find that contagion, when measured by the co-incidence within and across regions of changes, and conditional stock return volatility. Evidence that contagion is stronger for extreme September 2001 Associate Professor, College of Business Administration, Korea University ** Professor of Finance and Dean's Distinguished Research Professor, Fisher College of Business, Ohio State University *** Professor of Finance and Reese Chair of Banking and Monetary Economics, Fisher College of Business, Ohio State University, Research Associate, National Bureau of Economic Research. The authors are grateful to the Dice Center for Research on Financial Economics for support. We thank Tom Santner, Mark Berliner, Bob Leone, and Stan Lemeshow for useful discussions on methodology, Steve Cecchetti, Peter Christoffersen, Craig Doidge, Barry Eichengreen, Vihang Errunza, David Hirshleifer, Roberto Rigobon, Richard Roll, Karen Wruck and, especially, an anonymous referee and the editor, Cam Harvey, for comments. Comments from seminar participants at Hong Kong University of Science and Technology, Korea University, McGill University, Yale University, Michigan State University, Universiteit Maasstricht, Ohio State University, Rice University, Monte Verita Risk Management Conference (Ascona, Switzerland), Federal Reserve Bank of Chicago Annual Conference on Bank Structure and Competition, Global Investment Conference on International Investing (Whistler), and the NYSE Conference on Global Equity Markets in Transition (Hawaii) improved the paper.
This study examines the long-run hedging ability of gold and silver prices against alternative measures of consumer price index for the UK and the US. We employ a dataset that spans from 1791 to 2010, and both a time-invariant and a time-varying cointegration framework. We find that gold can at least fully hedge headline, expected and core CPI in the long-run. This ability tends to be stronger when we allow for the long term dynamics to vary over time. The inflation hedging ability of gold is on average higher in the US compared to the UK. Silver does not hedge US consumer prices albeit evidence emerges in favor of a time-varying long-run relationship in the UK.
This article investigates the causal relationships between gold and stock market performance or uncertainty by employing nonuniform weighting cross-correlations. In our sample period covering the last decade, we detect a unidirectional causality in mean from stock to gold, but find no causality in variance between the two. For subsample periods divided into pre- and post-current financial crisis, although we detect bidirectional causality in mean for the first sample period, there exists only a unilateral causality in mean and variance from stock to gold for the second sample period. These findings imply that flight-to-quality has occurred during the recent financial turmoil.
Will today’s solution become tomorrow’s problem? An increasing number of investors are becoming wary about the outlook for price stability. What if central banks leave interest rates too low for too long or pump too much money into the economy? If they do, they risk making today’s solution into tomorrow’s problem: a sharp rise in inflation. If inflation does materialize, then traditional inflation hedges, such as gold, commodities, real estate, and inflation-linked bonds, are likely to outperform other mainstream financial assets. Gold has a long history as an inflation hedge: In the eight years between 1974 and 2008 when U.S. inflation was high (defined as CPI inflation exceeding 5%) gold rose by an average of 14.9% in real terms, outperforming other assets such as bonds, equities, and even other commodities. Still, some investors may be reluctant to add an asset intended to function primarily as an inflation hedge to their portfolio at this stage, as there are currently equally compelling reasons for in...
This best-selling textbook addresses the need for an introduction to econometrics specifically written for finance students. Key features: • Thoroughly revised and updated, including two new chapters on panel data and limited dependent variable models • Problem-solving approach assumes no prior knowledge of econometrics emphasising intuition rather than formulae, giving students the skills and confidence to estimate and interpret models • Detailed examples and case studies from finance show students how techniques are applied in real research • Sample instructions and output from the popular computer package EViews enable students to implement models themselves and understand how to interpret results • Gives advice on planning and executing a project in empirical finance, preparing students for using econometrics in practice • Covers important modern topics such as time-series forecasting, volatility modelling, switching models and simulation methods • Thoroughly class-tested in leading finance schools. Bundle with EViews student version 6 available. Please contact us for more details.
This article aims to examine the role of gold quoted in Paris as an inflation hedge in France over the period 1949 to 2011. With a French monthly database of the prices of one-kilo ingots, Napoleon coins and the consumer price index, we test for the short-term and long-term relationships between gold and inflation in France. The Pearson and Spearman correlation coefficients and linear regression are used to study the short-term relationship. Cointegration tests of Engle and Granger (1987) and Phillips and Ouliaris (1990) are used to study the long-term relationship. The results show no significant relationship between the price of gold quoted in Paris and French inflation. This leads to the conclusion that gold quoted in Paris is not a good hedge against inflation in France, unlike gold quoted in London or New York.
This study analyzes the question whether gold provides the ability of hedging against inflation from a new perspective. Using data for four major economies, namely the USA, the UK, the Euro Area, and Japan, we allow for nonlinearity and discriminate between long-run and time-varying short-run dynamics. Thus, we conduct a Markov-switching vector error correction model (MS-VECM) approach for a sample period ranging from January 1970 to December 2011. Our main findings are threefold: first, we show that gold is partially able to hedge future inflation in the long-run and this ability is stronger for the USA and the UK compared to Japan and the Euro Area. In addition, the adjustment of the general price level is characterized by regime-dependence, implying that the usefulness of gold as an inflation hedge for investors crucially depends on the time horizon. Finally, one regime approximately accounts for times of turbulence while the other roughly corresponds to ‘normal times’.
In this article, we provide a detailed characterization of the intraday return volatility in gold futures contracts traded on the COMEX division of the New York Mercantile Exchange. The approach allows the study of intraday patterns, interday ARCH effects, and announcement effects in a coherent framework. We show that the intraday patterns exert a profound impact on the dynamics of return volatility. Among the 23 U.S. macroeconomic announcements, we identify employment reports, gross domestic product, consumer price index, and personal income as having the greatest impact. Finally, by appropriately filtering out the intraday patterns, we find that the high-frequency returns reveal long-memory volatility dependencies in the gold market, which have important implications on the pricing of long-term gold options and the determination of optimal hedge ratios. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:257–278, 2001
U.S. equity portfolio performance improves when precious metals are included in the asset allocation. The authors add to the evidence by comparing performance between direct and indirect investment in precious metals and also by determining whether benefits are related to monetary policy. They examine the consistency of performance over a long period for various allocation levels. Portfolio performance, with higher return and lower risk, improves with significant exposure to metals through investment in the common stocks of precious metal companies. Gold provides the highest individual performance improve- ment, and benefits from increased allocations are more evident during periods of monetary restriction.
This article starts by discussing the concept of ‘inflation hedging’ and provides estimates of ‘inflation betas’ for standard bond and well-diversified equity indices for over 45 countries. We show that such standard securities are poor inflation hedges. Expanding the menu of assets to Treasury bills, foreign bonds, real estate and gold improves matters but inflation risk remains difficult to hedge. We then describe how state-of-the-art term structure research has tried to uncover estimates of the inflation risk premium, the compensation for bearing inflation risk. Most studies, including very recent ones that actually use inflation-linked bonds and information in surveys to gauge inflation expectations, find the inflation risk premium to be sizeable and to substantially vary through time. This implies that governments should normally lower their financing costs through the issuance of index-linked bonds, at least in an ex ante sense. Our findings thus indicate a potentially important role for inflation index linked bonds. We briefly discuss the pros and cons of such bonds, focusing the discussion mostly on the situation in the United States, which started to issue Treasury Inflation Protected Securities (TIPS) in 1997. We argue that it is hard to negate the benefits of such securities for all relevant parties, unless the market in which they trade is highly deficient, which was actually the case in its early years in the United States.
—Geert Bekaert and Xiaozheng Wang
This paper is concerned with the specification and estimation of a model of the world gold market. Two approaches to an understanding of the gold market are common. The first approach is to regard it as an ordinary flow market in which gold is traded for its intrinsic commodity value and buyers use the gold as an input in the manufacture of some final good. The second is to see it as a stock market in which gold is held as a financial asset and no depletion of the stock of gold occurs. This paper considers both approaches to be oversimplified; it integrates the two views by separating industrial demand for gold from portfolio adjustment and by specifying behavioral equations for each. A price-expectations generating mechanism, required by the portfolio adjustment equation, is added. On the supply side, mine production is endogenized by a simple supply function. The model is closed by a market-clearing condition. An exposition of the workings of the model is illustrated by reference to simple and familiar diagrams. Particular emphasis is given to the path back to equilibrium after a disturbance of the initial equilibrium. The econometric model is not much modified from the suggested specification. Five endogenous variables are determined: price, output, industrial use, and speculative net hoarding demand for gold, as well as the price expected in the following period. The model is estimated by the two-stage least-squares method for the period from the second quarter of 1968 through the fourth quarter of 1974, and the estimated model is subjected to a dynamic simulation for the sample period to test its tracking performance. The simulation results indicate that it is quite plausible in representing historical developments in the gold market. Two appendices present (1) a note on the supply function of gold and (2) details of data sources and derivations. /// La présente étude traite de la spécification et de l'estimation d'un modèle du marché mondial de l'or. Il existe, en général, deux conceptions du marché de l'or. Suivant la première, on considère le marché de l'or comme un marché ordinaire de flux où l'or est échangé pour sa valeur intrinsèque en tant que marchandise utilisée par les acheteurs dans la fabrication d'un produit final. Suivant la deuxième, le marché de l'or est considéré comme une Bourse de valeurs où l'on détient de l'or en tant qu'actif financier et où n'intervient aucune diminution du stock d'or. Selon cette étude, ces deux conceptions sont trop simplistes; les auteurs tentent de les réunir en distinguant la demande industrielle d'or de la demande d'or qui s'exerce à des fins de placement et en représentant chacune d'elles par des équations de comportement appropriées. Les auteurs ajoutent un mécanisme qui engendre des anticipations de prix, nécessité par l'équation d'ajustement du portefeuille. Du côté de l'offre, la production minière est rendue endogène par une simple fonction d'offre. Le modèle est fermé par une condition d'équilibre. L'exposé du fonctionnement du modèle est illustré par des graphiques simples et bien connus. Les auteurs insistent particulièrement sur le sentier de retour à l'équilibre après une rupture de l'équilibre initial. Le modèle économétrique est très proche de la spécification suggérée. Cinq variables endogènes sont déterminées: le prix, la production, l'utilisation industrielle, la demande spéculative nette d'or aux fins de thésaurisation, enfin le prix anticipé pour la période suivante. Le modèle est estimé par la méthode des doubles moindres carrés pour la période allant du deuxième trimestre de 1968 à la fin du quatrième trimestre de 1974, et le modèle estimé est soumis à une simulation dynamique pour la période couverte par l'échantillon de manière à contrôler son aptitude prévisionnelle. Les résultats de la simulation montrent que ce modèle rend compte, de façon plausible, de l'évolution du marché de l'or observée dans le passé. Deux appendices contiennent 1) une note sur la fonction d'offre de l'or et 2) des précisions sur les sources des données et sur les calculs. /// Este artÃculo trata de la especificación y estimación de un modelo del mercado mundial del oro. Se suelen aplicar dos enfoques para estudiar el mercado del oro. El primero consiste en considerarlo como un mercado corriente de flujos en que el oro se negocia por su valor intrÃnseco de mercancÃa y los compradores lo usan como insumo en la manufactura de algún producto final. El segundo, en considerarlo como un mercado de masas en que el oro se mantiene como activo financiero y la masa de oro no se reduce. En este trabajo se considera que ambos enfoques son excesivamente simples y se integran separando la demanda industrial de oro del ajuste de cartera y especificando ecuaciones de comportamiento para cada uno. Se agrega un mecanismo de generación de expectativas de precios, necesario para la ecuación de ajuste de cartera. En cuanto a la oferta, la producción minera se hace endógena con una simple función de oferta. El modelo se cierra con una condición de agotamiento del mercado. La descripción del funcionamiento del modelo se ilustra por medio de diagramas sencillos y bien conocidos. Se insiste especialmente en el sendero de vuelta al equilibrio después de la perturbación del equilibrio inicial. El modelo econométrico no se modifica mucho con la especificación propuesta. Se determinan cinco variables endógenas: precio, producción, uso industrial y demanda de oro especulativa neta para atesoramiento, asà como el precio previsto para el perÃodo siguiente. El modelo para el perÃodo del segundo trimestre de 1968 al último de 1974 se estima por mÃnimos cuadrados bietápicos y el modelo estimado se hace objeto de una simulación dinámica para el perÃodo de la muestra para verificar su capacidad explicativa. Los resultados indican que la simulación es bastante efectiva para representar la evolución histórica del mercado del oro. En dos apéndices se presentan: 1) un comentario sobre la función de oferta de oro y 2) detalles sobre las fuentes y derivación de los datos.
This study examines the short-run and long-run inflation hedging effectiveness of gold in the United States and Japan during the period of January 1971 to January 2010. Previous research has shown in the long-run that inflation tends to appropriately increase the price of gold in the U.S., leading to gold's popularity as an asset in portfolios to reduce the risk against sudden inflation. However, gold is only partially effective in hedging against inflation in Japan. This research found that the rigidity between the price of gold and the consumer price index affects the inflation hedging ability of gold in the long-run. The gold price is characterized by market disequilibrium induced by the price rigidity, causing the price of gold to be unable to response to changes in the CPI. To explore the inflation hedging ability of gold in the short-run, this study further examines the price rigidity in low and high momentum regime. It is found during the low momentum regimes that, gold return is unable to hedge against inflation in either the U.S. or Japan. However, during high momentum regimes, gold return is able to hedge against inflation in the U.S., while the price rigidity in Japan causes the price of gold to not fully hedge against inflation in the short-run.
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 30Â 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.
This paper provides evidence in favour of the hypothesis that precious metals (gold, silver, platinum) act as short-run and long-run hedges against inflation. Using robust estimation techniques, this ability to hedge inflation is concentrated in the period before 1939 and around the second OPEC oil shock in 1979. During no other period could precious metals be used to hedge inflation.
Changes in variance, or volatility, over time can be modeled using the approach based on autoregressive conditional heteroscedasticity. Another approach is to model variance as an unobserved stochastic process. Although it is not easy to obtain the exact likelihood function for such stochastic variance models, they tie in closely with developments in finance theory and have certain statistical attractions. This article sets up a multivariate model, discusses its statistical treatment, and shows how it can be modified to capture common movements in volatility in a very natural way. The model is then fitted to daily observations on exchange rates.
The paper examines the performance of four multivariate volatility models, namely CCC, VARMA-GARCH, DCC and BEKK, for the crude oil spot and futures returns of two major benchmark international crude oil markets, Brent and WTI, to calculate optimal portfolio weights and optimal hedge ratios, and to suggest a crude oil hedge strategy. The empirical results show that the optimal portfolio weights of all multivariate volatility models for Brent suggest holding futures in larger proportions than spot. For WTI, however, DCC and BEKK suggest holding crude oil futures to spot, but CCC and VARMA-GARCH suggest holding crude oil spot to futures. In addition, the calculated optimal hedge ratios (OHRs) from each multivariate conditional volatility model give the time-varying hedge ratios, and recommend to short in crude oil futures with a high proportion of one dollar long in crude oil spot. Finally, the hedging effectiveness indicates that DCC (BEKK) is the best (worst) model for OHR calculation in terms of reducing the variance of the portfolio.
Severe flight to quality episodes involve uncertainty about the environment, not only risk about asset payoffs. The uncertainty is triggered by unusual events and untested financial innovations that lead agents to question their worldview. We present a model of crises and central bank policy that incorporates Knightian uncertainty. The model explains crisis regularities such as market-wide capital immobility, agents' disengagement from risk, and liquidity hoarding. We identify a social cost of these behaviors, and a benefit of a lender of last resort facility. The benefit is particularly high because public and private insurance are complements during uncertainty-driven crises. Copyright (c) 2008 The American Finance Association.
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.
A vast and often confusing economics literature relates competition to investment in innovation. Following Joseph Schumpeter, one view is that monopoly and large scale promote investment in research and development by allowing a firm to capture a larger fraction of its benefits and by providing a more stable platform for a firm to invest in R&D. Others argue that competition promotes innovation by increasing the cost to a firm that fails to innovate. This lecture surveys the literature at a level that is appropriate for an advanced undergraduate or graduate class and attempts to identify primary determinants of investment in R&D. Key issues are the extent of competition in product markets and in R&D, the degree of protection from imitators, and the dynamics of R&D competition. Competition in the product market using existing technologies increases the incentive to invest in R&D for inventions that are protected from imitators (e.g., by strong patent rights). Competition in R&D can speed the arrival of innovations. Without exclusive rights to an innovation, competition in the product market can reduce incentives to invest in R&D by reducing each innovator's payoff. There are many complications. Under some circumstances, a firm with market power has an incentive and ability to preempt rivals, and the dynamics of innovation competition can make it unprofitable for others to catch up to a firm that is ahead in an innovation race.
8 inflation-proof investments for Canadian investors
- D Crowder
Crowder, D.: 8 inflation-proof investments for Canadian investors. https://inflationcalculator.ca/
8-inflation-proof-investments-for-canadian-investors/. Accessed 13 Oct 2019
Linking global money supply to gold and to future inflation
- J C Artigas
Artigas, J. C.: Linking global money supply to gold and to future inflation. World Gold Council,
Gold: Report (2010)
Why gold, not oil, is the superior predictor of inflation
- D Ranson
- H C Wainright
Ranson, D., Wainright, H. C.: Why gold, not oil, is the superior predictor of inflation. Gold Report,
World Gold Council, 6-7 November (2005b)