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Is gold still a safe haven for stock markets? New insights through the tail thickness of portfolio return distributions

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  • Echaust, Krzysztof
  • Just, Małgorzata

Abstract

This study examines the safe-haven property of gold during two deep financial crashes: the global financial crisis (GFC) and the coronavirus disease 2019 (COVID-19) pandemic. Applying extreme value theory, we analyze the tail behavior of the returns of 46 stock indices sorted by geographic location and level of market development and then investigate these portfolios with various gold allocations. We focus on changes in the tail thickness of the portfolio return distribution as an effect of an increased gold allocation. The COVID-19 crisis exhibited heavier lower tails of the stock indices than the GFC. During the GFC, gold enabled heavy Fréchet-type tails to change into thin Gumbel-type tails, whereas during the COVID-19 crash, the tails remained heavy, even after hedging. Thus, gold acted as a safe-haven asset, significantly decreasing extreme downside risk during the GFC, but the same result cannot be confirmed for the COVID-19 pandemic.

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  • Echaust, Krzysztof & Just, Małgorzata, 2022. "Is gold still a safe haven for stock markets? New insights through the tail thickness of portfolio return distributions," Research in International Business and Finance, Elsevier, vol. 63(C).
    • Handle: RePEc:eee:riibaf:v:63:y:2022:i:c:s027553192200174x
    DOI: 10.1016/j.ribaf.2022.101788
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    More about this item

    Keywords

    Safe-haven asset; Fat tails; Global financial crisis (GFC); Coronavirus disease 2019 (COVID-19); Block maxima method (BMM); Extreme value theory (EVT);
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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