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The Generalisation of the DMCA Coefficient to Serve Distinguishing Between Hedge and Safe Haven Capabilities of the Gold

Mohamed Arbi Madani and Zied Ftiti ()

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Abstract: This paper aims to investigate the role of gold as a hedge and/or safe haven against oil price and currency market movements for medium (calm period) and large (extreme movement) fluctuations. In revisiting the role of gold, our study proposes new insights into the literature. First, our empirical design relaxes the assumption of homogeneous investors in favour of agents with different horizons. Second, we develop a new measure of correlation based on the fractal approach, called the q-detrending moving average cross-correlation coefficient. This allows us to measure the dependence for calm and extreme movements. The proposed measure is both time-varying and time-scale varying, taking into account the complex pattern of commodities and financial time series (chaotic, non-stationary, etc.). Using intraday data from May 2017 to March 2019, including 35608 observations for each variable, our results are as follows. First, we show a negative and significant average and tail dependence for all time scales between gold and USD exchange rates that is consistent with the gold's role as an effective hedge and safe-haven asset. Second, this study puts out average independence and positive and significant tail independence between gold and oil indicating that gold can be used by investors as a weak hedge but cannot be used as an effective safe-haven asset under exceptional market circumstances for all time scales. Third, we examine the hedging and stabilising benefits of gold over calm and turmoil periods for gold-oil futures and gold-currency portfolios by estimation of the optimal portfolio weights and the optimal hedge ratio. We confirm the usefulness of gold for hedging and safe havens at different investment horizons, which favors the inclusion of gold futures in oil futures and currency portfolios for risk management purposes.

Date: 2019-12
New Economics Papers: this item is included in nep-rmg
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Handle: RePEc:arx:papers:1912.12590