Is gold the best hedge and a safe haven under changing stock market volatility?
We evaluate the role of gold and other precious metals relative to volatility (Volatility Index (VIX)) as a hedge (negatively correlated with stocks) and safe haven (negatively correlated with stocks in extreme stock market declines) using data from the US stock market. Using daily data from November 1995 to November 2010, we find that gold, unlike other precious metals, serves as a hedge and a weak safe haven for US stock market. However, we find that VIX serves as a very strong hedge and a strong safe haven during our sample period. We also find that in periods of extremely low or high volatility, gold does not have a negative correlation with the US stock market. Our results show that VIX is a superior hedging tool and serves as a better safe haven than gold during our sample period. We highlight the practical significance of our results for financial market participants by conducting a portfolio analysis.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bekaert, Geert & Wu, Guojun, 2000.
"Asymmetric Volatility and Risk in Equity Markets,"
Review of Financial Studies,
Society for Financial Studies, vol. 13(1), pages 1-42.
- Marie Briere & Alexandre Burgues & Ombretta Signori, 2010.
"Volatility exposure for strategic asset allocation,"
ULB Institutional Repository
2013/169642, ULB -- Universite Libre de Bruxelles.
- Marie Briere & Alexandre Burgues & Ombretta Signori, 2008. "Volatility Exposure for Strategic Asset Allocation," Working Papers CEB 08-034.RS, ULB -- Universite Libre de Bruxelles.
- William Goetzmann & Lingfeng Li & K. Rouwenhorst, 2001.
"Long-Term Global Market Correlations,"
Yale School of Management Working Papers
ysm237, Yale School of Management, revised 01 Jan 2008.
- William N. Goetzmann & Lingfeng Li & K. Geert Rouwenhorst, 2001. "Long-Term Global Market Correlations," NBER Working Papers 8612, National Bureau of Economic Research, Inc.
- William N.Goetzmann & Lingfeng Li & K.Geert Rouwenhorst, 2003. "Long-Term Global Market Correlations," DNB Staff Reports (discontinued) 98, Netherlands Central Bank.
- Christie, Andrew A., 1982. "The stochastic behavior of common stock variances : Value, leverage and interest rate effects," Journal of Financial Economics, Elsevier, vol. 10(4), pages 407-432, December.
- Aggarwal, Reena & Inclan, Carla & Leal, Ricardo, 1999. "Volatility in Emerging Stock Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(01), pages 33-55, March.
- Baur, Dirk G. & McDermott, Thomas K., 2010.
"Is gold a safe haven? International evidence,"
Journal of Banking & Finance,
Elsevier, vol. 34(8), pages 1886-1898, August.
- Dirk G. Baur & Thomas K. McDermott, . "Is gold a safe haven? International evidence," The Institute for International Integration Studies Discussion Paper Series iiisdp310, IIIS.
- Shawkat Hammoudeh & Farooq Malik & Michael McAleer, 2011.
"Risk Management of Precious Metals,"
KIER Working Papers
765, Kyoto University, Institute of Economic Research.
- Shawkat Hammoudeh & Farooq Malik & Michael McAleer, 2010. "Risk Management of Precious Metals," Working Papers in Economics 10/37, University of Canterbury, Department of Economics and Finance.
- Shawkat Hammoudeh & Farooq Malik & Michael McAleer, 2011. "Risk Management of Precious Metals," Documentos de Trabajo del ICAE 2011-04, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
- Hammoudeh, S.M. & Malik, F. & McAleer, M.J., 2010. "Risk management of precious metals," Econometric Institute Research Papers EI 2010-48, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
- Hentschel, Ludger & Campbell, John, 1992.
"No News is Good News: An Asymmetric Model of Changing Volatility in Stock Returns,"
3220232, Harvard University Department of Economics.
- Campbell, John Y. & Hentschel, Ludger, 1992. "No news is good news *1: An asymmetric model of changing volatility in stock returns," Journal of Financial Economics, Elsevier, vol. 31(3), pages 281-318, June.
- John Y. Campbell & Ludger Hentschel, 1991. "No News is Good News: An Asymmetric Model of Changing Volatility in Stock Returns," NBER Working Papers 3742, National Bureau of Economic Research, Inc.
- Ewing, Bradley T. & Malik, Farooq, 2005. "Re-examining the asymmetric predictability of conditional variances: The role of sudden changes in variance," Journal of Banking & Finance, Elsevier, vol. 29(10), pages 2655-2673, October.
- Cătălin Stărică & Clive Granger, 2005.
"Nonstationarities in Stock Returns,"
The Review of Economics and Statistics,
MIT Press, vol. 87(3), pages 503-522, August.
- François Longin, 2001. "Extreme Correlation of International Equity Markets," Journal of Finance, American Finance Association, vol. 56(2), pages 649-676, 04.
- Dirk G. Baur & Brian M. Lucey, 2010.
"Is Gold a Hedge or a Safe Haven? An Analysis of Stocks, Bonds and Gold,"
The Financial Review,
Eastern Finance Association, vol. 45(2), pages 217-229, 05.
- Dirk G. Baur & Brian M. Lucey, 2007. "Is Gold a Hedge or a Safe Haven? An Analysis of Stocks, Bonds and Gold," The Institute for International Integration Studies Discussion Paper Series iiisdp198, IIIS.
- Farooq Malik, 2011. "Estimating the impact of good news on stock market volatility," Applied Financial Economics, Taylor & Francis Journals, vol. 21(8), pages 545-554.
- repec:dau:papers:123456789/7739 is not listed on IDEAS
When requesting a correction, please mention this item's handle: RePEc:eee:revfin:v:22:y:2013:i:2:p:47-52. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If references are entirely missing, you can add them using this form.