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Identifying safe haven assets for equity investors through an analysis of the stability of shock transmission

Author

Listed:
  • Thomas J. Flavin

    (Department of Economics Finance and Accounting, National University of Ireland, Maynooth)

  • Ciara E. Morley

    (Economic and Social Research Institute, Dublin 2.)

  • Ekaterini Panopoulou

    (Kent Business School, University of Kent.)

Abstract

Our analysis takes the perspective of an equity fund manager who seeks a potential safe haven asset to protect her portfolio during market downturns. We employ a regime-switching framework, within which we separate common and idiosyncratic shocks, to assess the suitability of gold, 10-year and 1-year U.S. Treasury bonds. We find evidence in favor of choosing either gold or the longer-dated bond as our safe haven asset. Both deliver risk reduction benefits as equity markets plunge. In contrast, the 1-year bond is not suitable as its vulnerability to contagious idiosyncratic shocks more than offsets its ability to hedge against common risk factors.

Suggested Citation

  • Thomas J. Flavin & Ciara E. Morley & Ekaterini Panopoulou, 2014. "Identifying safe haven assets for equity investors through an analysis of the stability of shock transmission," Economics Department Working Paper Series n249-14.pdf, Department of Economics, National University of Ireland - Maynooth.
    • Handle: RePEc:may:mayecw:n249-14.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Safe haven assets; Financial market crises; Shock transmission; Regime switching.;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G01 - Financial Economics - - General - - - Financial Crises
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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