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Identifying safe haven assets for equity investors through an analysis of the stability of shock transmission

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  • Flavin, Thomas J.
  • Morley, Ciara E.
  • Panopoulou, Ekaterini

Abstract

Our analysis takes the perspective of an equity fund manager who seeks a potential safe haven asset to protect her portfolio during market downturns. We employ a regime-switching framework, within which we separate common and idiosyncratic shocks, to assess the suitability of gold, 10-year and 1-year U.S. Treasury bonds. We find evidence in favour of choosing either gold or the longer-dated bond as our safe haven asset. Both deliver risk reduction benefits as equity markets plunge. In contrast, the 1-year bond is not suitable as its vulnerability to contagious idiosyncratic shocks more than offsets its ability to hedge against common risk factors.

Suggested Citation

  • Flavin, Thomas J. & Morley, Ciara E. & Panopoulou, Ekaterini, 2014. "Identifying safe haven assets for equity investors through an analysis of the stability of shock transmission," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 33(C), pages 137-154.
    • Handle: RePEc:eee:intfin:v:33:y:2014:i:c:p:137-154
    DOI: 10.1016/j.intfin.2014.08.001
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    More about this item

    Keywords

    Safe haven assets; Financial market crises; Shock transmission; Regime switching;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G01 - Financial Economics - - General - - - Financial Crises
    • 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

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