Hedges or safe havens—revisit the role of gold and USD against stock: a multivariate extended skew- copula approach

Chung-Shin Liu, Meng-Shiuh Chang, Ximing Wu () and Chin Man Chui

Quantitative Finance, 2016, vol. 16, issue 11, 1763-1789

Abstract: Our paper concerns the question of whether there exist hedge assets during extreme market conditions, which has become increasingly important since the recent financial crisis. This paper develops a novel extended skew-t copula model to examine the effectiveness of gold and US dollar (USD) as hedge or safe haven asset against stock prices for seven developed markets over the 2000–2013 period. Our results indicate the existence of skewness and heavy/thin tails in the distributions of all three types of assets in most of the developed markets, lending support to the employment of flexible distributions to evaluate the tail dependences among assets. We find that USD is preferred to gold as a hedge asset during normal market conditions, while both assets can serve as safe haven assets for most countries when stock markets crash. Our simultaneous analysis of the three assets advises against a joint hedge strategy of gold and USD due to the high tail dependence between them during extreme market conditions. This result highlights the importance of simultaneous modelling of multiple assets in financial risk analysis.

Date: 2016
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DOI: 10.1080/14697688.2016.1176238

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