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World gold prices and stock returns in China: insights for hedging and diversification strategies

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  • Mohamed El Hedi Arouri

    ()
    (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans)

  • Amine Lahiani

    (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans)

  • Duc Khuong Nguyen

    (IPAG Lab - IPAG Lab - Ipag)

Abstract

In this paper we make use of several multivariate GARCH models (CCC-, DCC-, BEKK-, diagonal BEKK-, and VAR-GARCH) to investigate both return and volatility spillovers between world gold prices and stock market in China over the period from March 22, 2004 through March 31, 2011. We also analyze the optimal weights and hedge ratios for gold-stock portfolio holdings and show how empirical results can be used to build effective diversification and hedging strategy. Our results show evidence of significant return and volatility cross effects between gold prices and stock prices in China. In particular, past gold returns play a crucial role in explaining the dynamics of conditional return and volatility of Chinese stock market and should thus be accounted for when forecasting future stock returns. Our portfolio analysis suggests that adding gold to a portfolio of Chinese stocks improves its risk-adjusted return and that gold risk exposures can be effectively hedged in portfolios of stocks over time. Finally, we show that the VAR-GARCH model performs better than the other multivariate GARCH models.

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Paper provided by HAL in its series Working Papers with number hal-00798038.

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Date of creation: 07 Mar 2013
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Handle: RePEc:hal:wpaper:hal-00798038

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