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The Risk Exposures of Safe Havens to Global and Regional Stock Market Shocks: A Novel Approach

Author

Listed:
  • Mehmet Balcilar

    () (Department of Economics, Eastern Mediterranean University, Famagusta, via Mersin 10, Northern Cyprus, Turkey; Department of Economics, University of Pretoria, Pretoria, 0002, South Africa; Montpellier Business School, Montpellier, France.)

  • Riza Demirer

    () (Department of Economics and Finance, Southern Illinois University Edwardsville, Edwardsville, IL 62026- 1102, USA)

  • Rangan Gupta

    () (Department of Economics, University of Pretoria, Pretoria, South Africa)

  • Mark E. Wohar

    () (College of Business Administration, University of Nebraska at Omaha, 6708 Pine Street, Omaha, NE 68182, USA and School of Business and Economics, Loughborough University, Leicestershire, LE11 3TU, UK)

Abstract

This paper examines the fundamental linkages between stock markets and safe haven assets by developing a two-factor, regime-based volatility spillover model with global and regional stock market shocks as risk factors. The risk exposures of safe havens with respect to global and regional shocks are found to display significant time variation and regime-specific features, with the exception of VIX for which consistent negative risk exposures are observed with respect to both global and regional shocks. While traditional safe havens like precious metals exhibit positive risk exposures to both regional and global shocks during high volatility periods, Swiss Francs, Japanese Yen and U.S. Treasuries are found to display either insignificant or negative risk exposures during market stress periods to equity market shocks, implying these assets would serve as more effective hedges or safe havens for equity investors. Our findings highlight the importance of dynamic models in assessing the linkages between safe haven assets and stock returns as static models would introduce large biases in diversification measures and optimal hedge ratios.

Suggested Citation

  • Mehmet Balcilar & Riza Demirer & Rangan Gupta & Mark E. Wohar, 2019. "The Risk Exposures of Safe Havens to Global and Regional Stock Market Shocks: A Novel Approach," Working Papers 201915, University of Pretoria, Department of Economics.
  • Handle: RePEc:pre:wpaper:201915
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Safe haven assets; Multivariate regime-switching; Equity market shocks;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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