Dynamic portfolio rebalancing with safe-haven assets

Diseko, Nomathemba Veronica and Bonga-Bonga, Lumengo and Manguzvane, Mathias Mandla (2015): Dynamic portfolio rebalancing with safe-haven assets.

Abstract

The main objective of this paper is to evaluate the role of safe-haven assets (SHAs) in enhancing the performance of an international portfolio (IP) during financial crises. The paper used daily price data from 2007 to 2024 and focused on three major financial crises: The Global Financial Crisis (GFC), the Covid-19 pandemic, and the Russia-Ukraine (RU) war. The methodology combined a Conditional Value at Risk (CVaR) optimisation with a periodic rebalancing strategy to assess the impact of including gold as the SHA on portfolio performance. The results showed that including the SHA, like gold, significantly improved portfolio performance during all three crises. Notably, portfolio performance decreased by -0.741% during the GFC, and portfolio performance decreased by -0.179% during COVID-19 when gold was included in the IP. In contrast, during the RU war, the highest portfolio value increased by 2.99% when gold was included in the IP. During the GFC, the portfolio that included gold experienced a reduced volatility of 20.589%, compared to that of a portfolio without gold, which had a volatility of 25.290%. The IP with SHAs showed a maximum drawdown, a critical measure of downside risk, of -0.38069, compared to the -0.55929 maximum drawdown of the IP without SHAs. Similar improvements were observed during the COVID-19 pandemic, where portfolio volatility decreased to 11.436%, and the highest Sharpe ratio was 0.301. The policy recommendation is that institutional investors incorporate SHAs such as gold into their portfolios. This strategy enhances portfolio resilience and reduces downside risks, ensuring better risk-adjusted returns.

• Item Type: MPRA Paper
• Language: English
• Keywords: safe haven, portfolio rebalancing, Conditional value-at-risk (CVaR), International portfolio
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

References

Ahad, M., Imran, Z. A., & Shahzad, K. (2024). Safe haven between European ESG and energy sector under Russian-Ukraine war: Role of sustainable investments for portfolio diversification. Energy Economics, 138, 107853.

Alshammari, S., & Obeid, H. (2023). Analyzing commodity futures and stock market indices: Hedging strategies using asymmetric dynamic conditional correlation models. Finance Research Letters, 56, 104081.

Arneric, J., & Paic, F. (2023). The safe haven feature of gold in the recent crisis: Rolling regression approach. Croatian Review of Economic, Business and Social Statistics, 109-122.

Asih, K. N., Achsani, N. A., Novianti, T., & Manurung, A. H. (2024). The role of ESG-based assets in generating the dynamic optimal portfolio in Indonesia. Cogent Business & Management, 11(1), 2382919.

Baur, D. G., & McDermott, T. K. (2010). Is gold a safe haven? International evidence. Journal of Banking & Finance, 1886-1898.

Beckmann, J., Berger, T., & Czudaj, R. (2015). Does gold act as a hedge or a safe haven for stocks? A smooth transition approach. Economic Modelling, 16-24.

Bekaert, G., & Harvey, C. R. (1997). Emerging equity market volatility. Journal of Financial Economics, 29-77.

Belhassine, O., & Karamti, C. (2021). Contagion and portfolio management in times of COVID-19. Economic Analysis and Policy, 73-86.

Bohn, H., & Tesar, L. L. (1996). U.S. Equity Investment in Foreign Markets: Portfolio Rebalancing or Return Chasing? The American Economic Review, 77-81.

Boubaker, H., & Larbi, O. B. (2022). Dynamic dependence and hedging strategies in BRICS stock markets with oil during crises. Economic Analysis and Policy, 263-279.

Bredin, D., Conlon, T., & Poti, V. (2015). Does gold glitter in the long-run? Gold as a hedge and safe haven across time and investment horizon. International Review of Financial Analysis, 320-328.

Camanho, N., Hau, H., & Rey, H. (2022). Global Portfolio Rebalancing and Exhange Rates. The Review of Financial Studies, 5228-5274.

Chevallier, J. (2023). ‘Safe Assets’ during COVID-19: A Portfolio Management Perspective. Commodities, 13-51.

Daryanani, G. (2008). Opportunistic Rebalancing: A New Paradigm for Wealth Managers . Journal of Financial Planning, 48-61.

de Santis, G., & Gerald, B. (1997). International Asset Pricing and Portfolio Diversification with Time-Varying Risk. The Journal of Finance, 1881-1912.

Dias, R. M., Horta, N. R., & Chambino, M. (2023). Portfolio rebalancing in times of stress: Capital markets vs. Commodities. Journal of Economic Analysis, 66-79.

Diaz, A., Esparcia, C., & Lopez, R. (2022). The diversifying role of socially responsible investments during the COVID-19 crisis: A risk management and portfolio performance analysis. Economic Analysis and Policy, 39-60.

Errunza, V. R. (1977). Gains from Portfolio Diversification into Less Developed Countries' Securities. Journal of International Business Studies, 83-99.

Fahlenbrach, R., Rageth, K., & Stulz, R. M. (2020). How Valuable is Financial Flexibility When Revenue Stops? Evidence from the COVID-19 Crisis. Swiss Finance Institute Research, 20-37.

Forbes, K. J., & Rigobon, R. (2002). No Contagion, Only Interdependence: Measuring Stock Market Comovements. The Journal of Finance, 2223-2261.

Gyntelberg, J., Loretan, M., Subhanij, T., & Chan, E. (2014). Exchange rate fluctuations and international portfolio rebalancing. Emerging Markets Review, 34-44.

Ji, Q., Zhang, D., & Zhao, Y. (2020). Searching for safe-haven assets during the COVID-19 pandemic. International Review of Financial Analysis, 71, 101526.

Harvey, C. R. (1995). Predictable Risk and Returns in Emerging Markets. The Review of Financial Studies, 773-816.

Kang, S. H., & Lee, J. W. (2019). The network connectedness of volatility spillovers across global futures markets. Physica A.

Karamti, C., & Belhassine, O. (2022). COVID-19 pandemic waves and global financial markets: Evidence from wavelet coherence analysis. Finance Research Letters.

Khaki, A., Prasad, M., Al-Mohamad, S., Bakry, W., & Vo, X. V. (2023). Re-evaluating portfolio diversification and design using cryptocurrencies: Are decentralized cryptocurrencies enough? . Research in International Business and Finance.

Kocaarslan, B., Sari, R., Gormus, A., & Soytas, U. (2017). Dynamic correlations between BRIC and U.S. stock markets: The asymmetric impact of volatility expectations in oil, gold and financial markets. Journal of Commodity Markets, 41-56.

Longin , F., & Solnik, B. (2001). Extreme Correlation of International Equity Markets. The Journal of Finance, 649-676. Markowitz, H. (1952). Portfolio Selection. The Journal of Finance, 77-91.

Ochim, F. I., & Ahmed, I. (2023). Implications of Russia- Ukraine War on World Peace and Security. African Journal of Politics and Administrative Studies, 216-230.

Rockafellar, T. R., & Uryasev, S. (2000). Optimization of Conditional Value-At-Risk. The Journal of Risk, 21-42.

Rockafellar, T. R., & Uryasev, S. (2001). Conditional Value-at-Risk for General Loss Distributions. Journal of Banking & Finance, 1443-1471.

Rubbaniy, G., Maghyereh, A., Cheffi, W., & Khalid, A. A. (2024). Dynamic connectedness, portfolio performance, and hedging effectiveness of the hydrogen economy, renewable energy, equity, and commodity markets: Insights from the COVID-19 pandemic and the Russia-Ukraine war. Journal of Cleaner Production, 452, 142217.

Shahzad, S. J., Bouri, E., Roubaud, D., Kristoufek, L., & Lucey, B. (2019). Is Bitcoin a better safe-haven investment than gold and commodities? International Review of Financial Analysis, 322-330.

Solnik, B. H. (1974). An Equilibrium Model of the International Capital Market. Journal of Economic Theory, 500-524.

Uryasev, S., & Rockafellar, T. R. (1999). Financial Risk Analysis via Conditional Value-at-Risk. Risk Management for the Future, 55-68.

Wu, Z., & McGoogan, J. M. (2020). Characteristics of and Important Lessons From the Coronavirus Disease 2019 (COVID-19) Outbreak in China: Summary of a Report of 72 314 Cases From the Chinese Center for Disease Control and Prevention. JAMA, 1239-1242.