Determinants of asymmetric return comovements of gold and other financial assets

Journal article

Poshakwale, Sunil S. and Mandal, Anandadeep 2016. Determinants of asymmetric return comovements of gold and other financial assets. International Review of Financial Analysis.
AuthorsPoshakwale, Sunil S. and Mandal, Anandadeep

Using conditional time-varying copula models, we characterize the dependence structure of return comovements of gold and other financial assets (stocks, bonds, real estate and oil) during economic expansion and contraction regimes. We also investigate which key macroeconomic and non-macroeconomic variables significantly impact the asset return comovements using a two stage Markov Switching Stochastic Volatility (MSSV) framework. Our results show that the non-macro variables have significant influence on the return comovements. We find that gold is an inappropriate hedge against interest rate changes for real-estate and oil-based portfolios, while for bond portfolios, gold offers a good hedge against inflation uncertainty. We also provide evidence that the “flight to safety” phenomenon is due to the implied volatility of the stock market, rather than the observed stock market uncertainty. Finally, we forecast the asset return comovements and examine their economic significance. We show that a dynamic MSSV model which includes the macroeconomic and non-macroeconomic variables yields superior forecast of future asset return comovements when compared with a multivariate conditional covariance model.

KeywordsGold; Forecasting; Asset return comovements; Markov Switching stochastic volatility model
JournalInternational Review of Financial Analysis
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Publication datesOct 2016
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Deposited31 Mar 2017, 11:17

Archived with thanks to International Review of Financial Analysis

ContributorsCranfield University and University of Derby
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