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Co-jumps in the U.S. interest rates and precious metals markets and their implications for investors

Artur Semeyutin and Gareth Downing

International Review of Financial Analysis, 2022, vol. 81, issue C

Abstract: Using one-minute intraday data and wavelet decomposition of stochastic processes we obtain realised VCOV matrices with and without price discontinuities in the U.S. Treasuries and precious metals futures. Our work provides determinants of co-jumps in gold, silver and U.S. Treasuries across the yield curve and empirically demonstrates impact of price discontinues on hypothetical investor through realised correlations, hedging effectiveness ratios and several portfolio settings. We find that co-jumps in gold and silver have similar monetary characteristics to co-jumps in gold or silver with U.S. Treasuries futures. We further unpack investor choices between precious metals and U.S. bonds under the presence of high-frequency risks. We show that behaviour puzzle of simultaneous demand for safety and quality during market turmoils disappears if investors are seeking maximum diversification. We also find that runs to safety do not offer statistically significant improvements in diversification benefits unlike runs to short-term quality. Other results uncover higher investments to gold due to the shifts in the U.S. yield curve and potential gains in realised hedging effectiveness for the end of the yield curve investors through asymmetry in co-jumps of gold and U.S. Treasuries during periods of extreme market volatility such as beginning of the COVID-19 pandemic.

Keywords: Co-jumps; Gold market; Treasury market; Portfolio allocations; Wavelets (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:81:y:2022:i:c:s1057521922000503

DOI: 10.1016/j.irfa.2022.102078

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