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Safe Haven Assets and Investor Behaviour Under Uncertainty

  • Dirk G. Baur

    ()

    (University of Technology, Sydney - School of Finance and Economics)

  • Thomas K.J. McDermott

    ()

    (School of Business and Institute for International Integration Studies, Trinity College Dublin)

We study two different safe haven assets, US government bonds and gold, and examine how the price changes of these assets can be used to infer investor behaviour under uncertainty. We find that investors are ambiguity-averse, that is they buy gold when faced with extreme uncertainty about the state of the economy or thefinancial system and when they receive ambiguous signals. In contrast, investors buyUS government bonds when faced with extreme but unambiguous signals. We also show that there is overreaction to ambiguous signals.

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Paper provided by IIIS in its series The Institute for International Integration Studies Discussion Paper Series with number iiisdp392.

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Length: 57 pages
Date of creation: Sep 2011
Date of revision: Feb 2012
Handle: RePEc:iis:dispap:iiisdp392
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  1. Angelo Ranaldo & Paul Söderlind, 2007. "Safe Haven Currencies," University of St. Gallen Department of Economics working paper series 2007 2007-22, Department of Economics, University of St. Gallen.
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  10. Nicholas Bloom, 2007. "The Impact of Uncertainty Shocks," NBER Working Papers 13385, National Bureau of Economic Research, Inc.
  11. 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.
  12. Chris Starmer, 2000. "Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 332-382, June.
  13. Christian Upper, 2001. "How safe was the "Safe Haven"? Financial market liquidity during the 1998 turbulences," BIS Papers chapters, in: Bank for International Settlements (ed.), Market liquidity: proceedings of a workshop held at the BIS, volume 2, pages 241-266 Bank for International Settlements.
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  17. Kristin Forbes & Roberto Rigobon, 1999. "No Contagion, Only Interdependence: Measuring Stock Market Co-movements," NBER Working Papers 7267, National Bureau of Economic Research, Inc.
  18. Barberis, Nicholas & Shleifer, Andrei & Vishny, Robert, 1998. "A model of investor sentiment," Journal of Financial Economics, Elsevier, vol. 49(3), pages 307-343, September.
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  23. Kaul, Aditya & Sapp, Stephen, 2006. "Y2K fears and safe haven trading of the U.S. dollar," Journal of International Money and Finance, Elsevier, vol. 25(5), pages 760-779, August.
  24. Ricardo J. Caballero & Arvind Krishnamurthy, 2007. "Collective Risk Management in a Flight to Quality Episode," NBER Working Papers 12896, National Bureau of Economic Research, Inc.
  25. Brian H. Boyer & Tomomi Kumagai & Kathy Yuan, 2006. "How Do Crises Spread? Evidence from Accessible and Inaccessible Stock Indices," Journal of Finance, American Finance Association, vol. 61(2), pages 957-1003, 04.
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  27. Daniel Ellsberg, 2000. "Risk, Ambiguity and the Savage Axioms," Levine's Working Paper Archive 7605, David K. Levine.
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