Dynamic Linkages between Gold and Equity Prices: Evidence from Indian Financial Services and Information Technology Companies

Shubhasis Dey () and Aravind Sampath ()
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Shubhasis Dey: Indian Institute of Management Kozhikode
Aravind Sampath: Indian Institute of Management Kozhikode

No 251, Working papers from Indian Institute of Management Kozhikode

Abstract: In this paper, we use multivariate GARCH models to analyze dynamic linkages between gold and equity price returns. We model dynamic conditional correlations and volatility spillovers between these assets. Our results indicate that spot gold can be an effective hedge against stock prices. A $1 long position in the NIFTY Financial Services index can be hedged for 12 cents with a short position in spot gold and a $1 long position in the NIFTY Information Technology index can be hedged for 5 cents with a short position in spot gold. Gold also seems to act as a safe haven asset during the Global Financial Crisis period between 2007 and 2009. Our results suggest that crisis or not a prudent investor should allocate around 30 per cent of her investable assets in gold within a gold/stock portfolio. Given that in India around 41% of the population is still without access to banking services and are hence deprived of interest-earning deposits, it is not very surprising to find gold’s optimal portfolio weight to be as high as 30 per cent. However as banking services penetration in India improves and its inflation rate stabilizes around a low inflation target, we expect this portfolio weight to gradually come down to around 10% that is widely observed in studies involving more advanced economies.

Keywords: Spot gold; stock; MGARCH; correlation; volatility spillovers (search for similar items in EconPapers)
Pages: 24 pages
Date: 2017-06
New Economics Papers: this item is included in nep-rmg
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