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Is gold a safe haven or a hedge for the US dollar? Implications for risk management

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  • Reboredo, Juan C.

Abstract

We assess the role of gold as a safe haven or hedge against the US dollar (USD) using copulas to characterize average and extreme market dependence between gold and the USD. For a wide set of currencies, our empirical evidence revealed (1) positive and significant average dependence between gold and USD depreciation, consistent with the fact that gold can act as hedge against USD rate movements, and (2) symmetric tail dependence between gold and USD exchange rates, indicating that gold can act as an effective safe haven against extreme USD rate movements. We evaluate the implications for mixed gold-currency portfolios, finding evidence of diversification benefits and downside risk reduction that confirms the usefulness of gold in currency portfolio risk management.

Suggested Citation

  • Reboredo, Juan C., 2013. "Is gold a safe haven or a hedge for the US dollar? Implications for risk management," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2665-2676.
  • Handle: RePEc:eee:jbfina:v:37:y:2013:i:8:p:2665-2676
    DOI: 10.1016/j.jbankfin.2013.03.020
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    More about this item

    Keywords

    C52; C58; F3; G1; Gold; Exchange rates; Hedge; Safe haven; Copulas;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F3 - International Economics - - International Finance
    • G1 - Financial Economics - - General Financial Markets

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