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Dynamic causality between the U.S. stock market, the Chinese stock market and the global gold market: implications for individual investors’ diversification strategies

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  • Ganghua Mei
  • Robert McNown

Abstract

This paper proposes a generalization of the prior VAR and EGARCH model to explore the linkage between returns and volatility transmissions in the U.S. stock market, the Chinese stock market, and the global gold market from 10 July 1996 to 20 July 2018. We found that past returns of the U.S. stock market can predict the current returns of the other two markets, and that significant reciprocal volatility transmission existed within and across all three markets. We further implemented average out-of-sample (OOS) forecasting to show that a risk-adjusted portfolio, such as mean-variance with sample estimator, does not outperform an equal-weighted portfolio. This provides insights for individual investors and helps to explain the ongoing disagreement in the portfolio literature concerning the effectiveness of risk-adjusted portfolios and equal-weighted portfolios when the number of assets is small.

Suggested Citation

  • Ganghua Mei & Robert McNown, 2019. "Dynamic causality between the U.S. stock market, the Chinese stock market and the global gold market: implications for individual investors’ diversification strategies," Applied Economics, Taylor & Francis Journals, vol. 51(43), pages 4742-4756, September.
    • Handle: RePEc:taf:applec:v:51:y:2019:i:43:p:4742-4756
    DOI: 10.1080/00036846.2019.1601156
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    Cited by:

    1. Hemant Manuj, 2021. "Is Gold a Hedge against Stock Price Risk in U.S. or Indian Markets?," Risks, MDPI, vol. 9(10), pages 1-14, September.
    2. Yun Shi & Lin Yang & Mei Huang & Jun Steed Huang, 2021. "Multi-Factorized Semi-Covariance of Stock Markets and Gold Price," JRFM, MDPI, vol. 14(4), pages 1-11, April.
    3. You, Kefei & Raju Chinthalapati, V.L. & Mishra, Tapas & Patra, Ramakanta, 2024. "International trade network and stock market connectedness: Evidence from eleven major economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 91(C).

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