The effect of global and regional stock market shocks on safe haven assets

Mehmet Balcilar, Riza Demirer, Rangan Gupta and Mark Wohar ()

Structural Change and Economic Dynamics, 2020, vol. 54, issue C, 297-308

Abstract: 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 stock market 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 stock market shocks. While traditional safe havens like precious metals exhibit positive risk exposures to both regional and global stock market shocks during high volatility periods, Swiss Franc, 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.

Keywords: Safe haven assets; Multivariate regime-switching; Equity market shocks (search for similar items in EconPapers)
JEL-codes: C32 G11 G15 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:streco:v:54:y:2020:i:c:p:297-308

DOI: 10.1016/j.strueco.2020.04.004

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