Hedging Stocks in Crises and Market Downturns with Gold and Bonds: Industry Analysis

This paper analyzes the dynamic return relationships between stocks and other asset classes, namely gold, government bonds and corporate bonds, to investigate whether these asset classes can serve as a hedge and a safe haven for stocks during crises and stock market downturns in Thailand. The result suggests that gold generally provides a hedge for the stock market and industry indexes, and that it also works as a safe haven for stocks in some crises. However, bonds tend to offer less hedging effect. In fact, the correlations between bonds and stocks even increase in some crises, contradicting a common belief that bonds are a safe haven for stocks. A possible explanation for this striking finding is that since stocks and bonds share similar sources of companies’ cash flows, bonds are viewed as risky as stocks in times of extreme market volatilities and hence market players treat them as one and the same. Finally, these hedging and safe haven effects are observed in some, but not all, industries and they do not behave consistently in every crisis.