Is Gold a Sometime Safe Haven or an Always Hedge for Equity Investors? A Markov-Switching CAPM Approach for US and UK Stock Indices

18 Pages Posted: 26 Sep 2018

See all articles by Zhen He

Zhen He

University of York - The York Management School

Fergal A. O'Connor

University College Cork; University of York - The York Management School; University of Dublin - Business School and Institute for International Integration Studies

Jacco Thijssen

University of York - The York Management School

Date Written: September 5, 2018

Abstract

This paper re-examines gold’s role as a tool for investors to manage their portfolio risk. We begin by assessing gold’s average relationship to an investor’s diversified equity portfolio by applying the basic Capital Asset Pricing Model (CAPM) to UK and US equity indices. Next, we apply a Markov-Switching CAPM to assess whether two distinct states exist between gold’s relationship with the Market Portfolio. This approach allows the data to determine if two separate states exist and, if so, whether one state matches the definition of a Safe Haven from the literature. Using this new approach, we find that gold is consistently a Hedge, but that no distinct Safe Haven state exists between gold and UK or US stock markets.

Keywords: Gold, Safe Haven, Markov-Switching, Hedge

Suggested Citation

He, Zhen and O'Connor, Fergal A. and Thijssen, Jacco, Is Gold a Sometime Safe Haven or an Always Hedge for Equity Investors? A Markov-Switching CAPM Approach for US and UK Stock Indices (September 5, 2018). International Review of Financial Analysis, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3244371

Zhen He

University of York - The York Management School ( email )

Sally Baldwin Buildings
Heslington
York, North Yorkshire YO10 5DD
United Kingdom

Fergal A. O'Connor (Contact Author)

University College Cork ( email )

College Road
Cork
Ireland

University of York - The York Management School ( email )

Sally Baldwin Buildings
Heslington
York, North Yorkshire YO10 5DD
United Kingdom

University of Dublin - Business School and Institute for International Integration Studies ( email )

2-3 College Green
Dublin, Leinster D2
Ireland

Jacco Thijssen

University of York - The York Management School ( email )

Sally Baldwin Buildings
Heslington
York, North Yorkshire YO10 5DD
United Kingdom

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