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Gold in Portfolio: A Long-Term or Short-Term Diversifier?

In: HANDBOOK OF FINANCIAL ECONOMETRICS, MATHEMATICS, STATISTICS, AND MACHINE LEARNING

Author

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  • Fu-Lai Lin
  • Sheng-Yung Yang
  • Yu-Fen Chen

Abstract

The purpose of this chapter is to evaluate the role played by gold in a diversified portfolio comprised of bond and stock. The continuous wavelet transform analysis is applied to capture the correlation features between gold and other risky assets at specific time horizons to determine whether gold should be included in a diversified portfolio. This chapter uses the US stock, bond, and gold data from 1990 until 2013 to investigate the optimal weights of gold obtained from the minimum variance portfolio. Empirical findings suggest that little evidences support that gold acts an efficient diversifier in traditional stock and bond portfolio. Gold typically has been a long-term diversifier in the traditional portfolio comprised of bond and stock only before the early 2000s and acts as a short-term diversifier in times of crisis periods. The significant drop in the long-term weight of gold indicate that gold loses much of its long-term role in the diversified portfolio. These findings are useful for portfolio managers to justify the gold’s diversification benefits over different investment horizons.

Suggested Citation

  • Fu-Lai Lin & Sheng-Yung Yang & Yu-Fen Chen, 2020. "Gold in Portfolio: A Long-Term or Short-Term Diversifier?," World Scientific Book Chapters, in: Cheng Few Lee & John C Lee (ed.), HANDBOOK OF FINANCIAL ECONOMETRICS, MATHEMATICS, STATISTICS, AND MACHINE LEARNING, chapter 4, pages 199-223, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789811202391_0004
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    More about this item

    Keywords

    Financial Econometrics; Financial Mathematics; Financial Statistics; Financial Technology; Machine Learning; Covariance Regression; Cluster Effect; Option Bound; Dynamic Capital Budgeting; Big Data;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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