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Dynamic correlations and portfolio implications across stock and commodity markets before and during the COVID-19 era: A key role of gold

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  • Liu, Xiaoxing
  • Shehzad, Khurram
  • Kocak, Emrah
  • Zaman, Umer

Abstract

Novel Coronavirus (COVID-19) has affected stock markets around the globe, adding serious challenges to asset allocations and hedging strategies. This investigation analyses the dynamic correlations and portfolio implications among the S&P 500 index and various commodities (gold, WTI crude oil, Brent oil, beverages, and wheat) before and during the COVID-19 era. Using multivariate asymmetric GARCH models, the results show weak correlations during the standard period. However, the correlations intensify and become more complicated during the COVID-19 era, especially between gold and S&P 500. Similarly, bidirectional return and volatility spillovers across stock-commodity markets are more pronounced during the COVID-19 outbreak. Analysis involving the optimal portfolio weights and time-varying hedge ratios indicates that a $1long position in the S&P 500 can be hedged for 15 cents in crude oil during the standard period and for 33 cents in gold during the COVID-19 era. A portfolio of S&P 500 – beverages displays the highest VaR, while a portfolio of S&P 500 – gold displays the lowest VaR, especially during the COVID-19 era. This finding suggests that gold offers better portfolio diversification benefits and downside risk reductions, which are useful in determining strategies for portfolio investors during the COVID-19 outbreak.

Suggested Citation

  • Liu, Xiaoxing & Shehzad, Khurram & Kocak, Emrah & Zaman, Umer, 2022. "Dynamic correlations and portfolio implications across stock and commodity markets before and during the COVID-19 era: A key role of gold," Resources Policy, Elsevier, vol. 79(C).
    • Handle: RePEc:eee:jrpoli:v:79:y:2022:i:c:s0301420722004287
    DOI: 10.1016/j.resourpol.2022.102985
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    More about this item

    Keywords

    Mean and volatility spillovers; Crude oil; Gold; Commodity markets; S&P 500 index; Value at risk; VAR-DCC-MEGARCH model;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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