How can investors build a better portfolio in small open economies? Evidence from Asia’s Four Little Dragons

Xiyong Dong, Changhong Li and Seong-Min Yoon

The North American Journal of Economics and Finance, 2021, vol. 58, issue C

Abstract: This study investigates the role of hedging and portfolio design among stocks, exchange rates, and gold in small open economies (SOEs) from 4 January 2000 to 31 March 2020. We adopt the trivariate dynamic conditional correlation-fractionally integrated asymmetric power ARCH model and unconditional quantile regression model, and our findings show that the hedging role of the U.S. dollar (USD) and gold against stocks differs under regular and extreme market conditions. The USD can act as a powerful hedge asset for stocks in regular market periods. Moreover, during the global financial crisis and COVID-19 outbreak, the safe-haven effect of gold becomes stronger for almost all stocks, whereas the USD can serve as a strong safe haven against stock markets of Korea, Taiwan, and Singapore when stock returns are extremely low. In terms of portfolio designing, we find that adding the USD and gold to portfolios improves their hedging effectiveness, and the optimally weighted stock-USD-gold portfolio is the best portfolio strategy, irrespective of referring to return or risk.

Keywords: Small open economies; Multi-asset portfolio; Hedge asset; Safe haven; Dynamic conditional correlation model; Unconditional quantile regression (search for similar items in EconPapers)
JEL-codes: C58 F65 G11 G15 (search for similar items in EconPapers)
Date: 2021
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:ecofin:v:58:y:2021:i:c:s1062940821001200

DOI: 10.1016/j.najef.2021.101500

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