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Identifying safe haven assets for equity investors through an analysis of the stability of shock transmission

Thomas Flavin (), Ciara Morley and Ekaterini Panopoulou ()

Economics, Finance and Accounting Department Working Paper Series from Department of Economics, Finance and Accounting, National University of Ireland - Maynooth

Abstract: Our analysis takes the perspective of an equity fund manager who seeks a potential safe haven asset to protect her portfolio during market downturns. We employ a regime-switching framework, within which we separate common and idiosyncratic shocks, to assess the suitability of gold, 10-year and 1-year U.S. Treasury bonds. We find evidence in favor of choosing either gold or the longer-dated bond as our safe haven asset. Both deliver risk reduction benefits as equity markets plunge. In contrast, the 1-year bond is not suitable as its vulnerability to contagious idiosyncratic shocks more than offsets its ability to hedge against common risk factors.

Keywords: Safe haven assets; Financial market crises; Shock transmission; Regime switching. (search for similar items in EconPapers)
JEL-codes: G11 G01 C32 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2014
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