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N° 2010-13 |
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| July 2010 |
| Gold and Financial Assets: Are There Any Safe Havens in Bear Markets? |
Virginie Coudert
Hélène Raymond |
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| This paper looks into the role of gold as a safe haven against stocks during recessions and
bear markets. Following Baur and McDermott (2010) and Baur and Lucey (2010), we
characterize safe havens by their negative correlations with stocks during crises. We extend
their results in three ways. First, we identify crisis periods by exogeneous means using,
successively, recession periods provided by the NBER and periods of bear US stock markets.
Second, we estimate a model allowing for time varying conditional covariances between gold
and stocks returns. Third, we test if long run relationships exist between gold and stocks and
explore whether they can be used to construct portfolios immune to crises. The regressions
are run on monthly data for gold and several stock market indices (France, Germany, UK, US,
G7) over the period 1978:2-2009:1. In the short run, we find that the correlation between gold
and stocks is close to zero during recessions, which qualifies gold for being a “weak safe
haven”. This is also the case during bear markets against the stock indices of most considered
countries, although gold appears as a strong hedge versus the US stock index. A closer look at
the data shows that these results only hold on average and not for every crisis episode or
every country. In the longer run a negative relationships exists between gold and some stock
markets (France, UK, US). However, it does not allow the construction of a hedged portfolio
immune to all crises. Overall, despite its interest for the diversification of portfolios, gold
stays a risky investment, even during crises. |
Non-technical summary  |
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Résumé
non-technique
en français |
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| Full text |
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| Gold; stock; safe haven; hedge; nonlinearity |
Keywords |
| G01; G15; F30; F36 |
JEL classification |
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