Portfolio Diversification during Covid-19 Outbreak: Is Gold a Hedge and a Safe-Haven Asset?

Vladimir Živanović, Jelena Vitomir and Bojan Đorđević

Prague Economic Papers, 2022, vol. 2022, issue 2, 169-194

Abstract: Price changes on all international financial and commodity markets have shown a sig- nificant correlation. The correlation dependence increased due to macroeconomic changes that led to cyclical economic trends caused by the COVID-19 pandemic. In the new economic circumstances, there has been a change in investment strategy of individual and institutional investors. The investment portfolios have increased in demand related to the purchase of gold, seen as a safe-haven asset, which has led to significant growth in aggregate demand on the international precious metals market. This paper deals with a dynamic conditional correlation (DCC) between the investment in gold as an asset and the movement of major world market indices. We used cryptocurrency (bitcoin) volatility as an independent variable in the model. We tested its correlation to the other major market indices and gold as a safe-haven asset. Related to a proposed model based on GARCH DCC and the Generalised Reduced Gradient (GDR) algorithm, we set up the Hedging Effectiveness (HE) index and an optimally weighted investment portfolio.

Keywords: COVID-19; gold; market indices; bitcoin; portfolio diversification; hedging; safe-haven asset (search for similar items in EconPapers)
JEL-codes: G15 G20 G21 G23 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.18267/j.pep.802

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