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

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Author Info
Dirk G. Baur
Brian M. Lucey

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Abstract

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.

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Paper provided by IIIS in its series The Institute for International Integration Studies Discussion Paper Series with number iiisdp198.

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Date of creation: 17 Jan 2007
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Handle: RePEc:iis:dispap:iiisdp198

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Related research
Keywords: Safe haven; gold; stock-bond correlation; flight-to-quality;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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  1. P. Hartmann & S. Straetmans & C. G. de Vries, 2004. "Asset Market Linkages in Crisis Periods," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 313-326, 01. [Downloadable!] (restricted)
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  2. Brian M Lucey & Edel Tully & Valerio Poti, 2005. "International Portfolio Formation, Skewness & the Role of Gold," The Institute for International Integration Studies Discussion Paper Series iiisdp030, IIIS. [Downloadable!]
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  3. Christophe Faugere & Julian Van Erlach, 2004. "The Price of Gold: A Global Required Yield Theory," Finance 0403003, EconWPA. [Downloadable!]
  4. Davidson, Sinclair & Faff, Robert & Hillier, David, 2003. "Gold factor exposures in international asset pricing," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 13(3), pages 271-289, July. [Downloadable!] (restricted)
  5. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-50, July.
  6. Capie, Forrest & Mills, Terence C. & Wood, Geoffrey, 2005. "Gold as a hedge against the dollar," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 15(4), pages 343-352, October. [Downloadable!] (restricted)
  7. Jesus Gonzalo & Jose Olmo, 2005. "Contagion Versus Flight To Quality In Financial Markets," Economics Working Papers we051810, Universidad Carlos III, Departamento de Economía. [Downloadable!]
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  1. Felices, Guillermo & Grisse, Christian & Yang, Jing, 2009. "International financial transmission: emerging and mature markets," Bank of England working papers 373, Bank of England. [Downloadable!]
  2. Ranaldo, Angelo & Söderlind, Paul, 2009. "Safe Haven Currencies," CEPR Discussion Papers 7249, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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