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Safe Haven Assets and Investor Behaviour Under Uncertainty

Author

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  • 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)

Abstract

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.

Suggested Citation

  • Dirk G. Baur & Thomas K.J. McDermott, 2011. "Safe Haven Assets and Investor Behaviour Under Uncertainty," The Institute for International Integration Studies Discussion Paper Series iiisdp392, IIIS, revised Feb 2012.
  • Handle: RePEc:iis:dispap:iiisdp392
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    References listed on IDEAS

    as
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    Cited by:

    1. Aye, Goodness & Gupta, Rangan & Hammoudeh, Shawkat & Kim, Won Joong, 2015. "Forecasting the price of gold using dynamic model averaging," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 257-266.
    2. Hossfeld, Oliver & MacDonald, Ronald, 2015. "Carry funding and safe haven currencies: A threshold regression approach," Journal of International Money and Finance, Elsevier, vol. 59(C), pages 185-202.

    More about this item

    Keywords

    uncertainty; financial crisis; safe haven; gold; bonds; Ellsberg decision rule; black swan event;

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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