Fear propagation and return dynamics

This study explores the intertemporal relationship between the gold-to-platinum price ratio (logGP) across economic conditions and international equity risk premiums. We find that logGP provides distinct predictive signals based on economic states, with logGP during U.S. contractions works as a strong and robust predictor of global stock market returns both in-sample and out-of-sample. This predictability stems not from U.S. market spillovers but rather reflects investors’ tail risk concerns and forecasts of economic activity. Our results indicate that U.S. recessions act as wake-up calls for international investors. Concerns about a U.S. recession propagating to other economies prompts investors to reassess local risks, thereby influencing local stock market dynamics.