The Risk Exposures of Safe Havens to Global and Regional Stock Market Shocks: A Novel Approach

This paper examines the fundamental linkages between stock markets and safe haven assets by developing a two-factor, regime-based volatility spillover model with global and regional stock market shocks as risk factors. The risk exposures of safe havens with respect to global and regional shocks are found to display significant time variation and regime-specific features, with the exception of VIX for which consistent negative risk exposures are observed with respect to both global and regional shocks. While traditional safe havens like precious metals exhibit positive risk exposures to both regional and global shocks during high volatility periods, Swiss Francs, Japanese Yen and U.S. Treasuries are found to display either insignificant or negative risk exposures during market stress periods to equity market shocks, implying these assets would serve as more effective hedges or safe havens for equity investors. Our findings highlight the importance of dynamic models in assessing the linkages between safe haven assets and stock returns as static models would introduce large biases in diversification measures and optimal hedge ratios.