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

Xiaoxing Liu, Khurram Shehzad (), Emrah Koçak and Umer Zaman

Resources Policy, 2022, vol. 79, issue C

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.

Keywords: Mean and volatility spillovers; Crude oil; Gold; Commodity markets; S&P 500 index; Value at risk; VAR-DCC-MEGARCH model (search for similar items in EconPapers)
JEL-codes: C58 G1 G11 G14 G15 G17 G32 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jrpoli:v:79:y:2022:i:c:s0301420722004287

DOI: 10.1016/j.resourpol.2022.102985

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