This chapter investigates the safe haven property and hedge of gold especially during GFC and COVID-19 for G7 stock markets by using DCC-GARCH and wavelet coherence analysis. The findings reveal that the dynamic conditional correlation between gold and each G7 stock market decreased significantly during extreme market conditions, especially during GFC and COVID-19. The results show that gold served as a strong safe haven asset for all G7 stock markets except Nikkei225 during GFC. However, gold has maintained this traditional role as a safe haven only for CAC40, S&PTSX, FTSE/MIB, and FTSE100 during the COVID-19 pandemic. The optimal portfolio weights of gold in each G7 stock market significantly increased during GFG and COVID-19 pandemic, meaning that investors should invest more in the gold as a ‘flight-to-safety asset' during market turmoil. The decomposition of the coherence between gold and each G7 stock market into three investment horizons demonstrates a weak correlation in both the short term and the long term for the normal and extreme conditions market.
Top1. Introduction
Co-movement between the gold market and the international stock market has caused increased attention from portfolio investors, risk managers, and policymakers. In the finance literature, gold is acting as a hedge, safe haven, and diversifier asset against all stock markets. Several empirical studies have analyzed the correlation between stocks markets and gold to examine their property for the stock market. Baur and McDermott (2010), define a hedge and a safe haven as follows: A strong (weak) hedge is defined as an asset that is negatively correlated (uncorrelated) with another asset on average. However, it has to be noted that a hedge does not necessarily have the property of reducing losses in periods of extremely declining markets as the asset could exhibit a positive correlation in such periods and a negative correlation in normal times, which could result in a negative correlation on average. A strong (weak) safe haven is defined as an asset that is negatively correlated (uncorrelated) with the stock market in periods of extreme stock market declines. The specific property of a safe haven asset is the non-positive correlation with the stock market in extreme market conditions. However, note that this property does not force the correlation to be positive or negative on average but only to be zero or negative in specific periods of stock market declines.
Several studies have examined whether gold acts as a safe haven hedge against the financial market in general and the stock market in particular during GFC. Ngun et al. (2016) show that gold may be a safe haven asset during the market crash in Malaysia, Singapore, Thailand, the UK, and the US, but not for the Indonesian, Japanese, and the Philippines. Shahzad et al. (2019) find that gold roles an undisputable safe haven and hedge against G7 stock markets, they also notice that gold offered conditional diversification benefits in a portfolio composed of G7 stock markets.
Baur and Lucey)2010) and Beckmann et al. (2015) observe that gold acts as a hedge against equities in normal market conditional and viewed safe haven properties against equities during extreme market conditional. Chiki (2016) investigates the dynamic relationships between gold and BRICS stock markets. He concludes that the dynamic conditional correlations switch between negative and positive values over the sample period. Peng (2019) suggests that during the global financial crisis gold has outperformed, as a strong safe haven against the china stock market.
In the same vein, Bekiros et al. (2017) show that contagious effects of the global financial crisis have prompted investors to seek safe haven, hedging, and diversification opportunities in alternative asset classes such as gold. Jiang et al. (2019) found a negative correlation between BRICS stock markets and precious metals during extreme market conditions, especially GFC. They notice also that gold is the most effective asset to hedge the risk of BRICS stock markets. Baur et McDermott (2010) the role of gold in the global financial system. They find evidence that gold is both a strong safe haven and hedge for European stock markets and the US but not for BRIC stock markets, Australia, Japan, and Canada.
Chkili (2017) investigates if gold acts as a hedge or safe haven for the Islamic stock market. Using a Markov switching approach, he concludes that gold can act as a weak hedge and a strong safe haven against extreme Islamic stock market movements. The GFC caused a significant change in the connectedness structure between gold and stock markets. The correlations are low to negative during the major financial crises meaning that gold can move as a safe haven or hedge against extreme market conditions. Therefore, gold provides a diversification opportunity for the stock markets during turbulent periods. In this case, investors should give more weight to gold than stocks in their gold–stock portfolios, whereas they should allocate more funds into stocks than oil to minimize risk in their oil–stock portfolios (Abuzayed et al., 2021; Mensi et al., 2021; Trabelsi et al., 2021; Alkhazali and Zoubi, 2020).