The Role of Gold as a Hedge and Safe Haven in Shariah-Compliant Portfolios

Nagayev, Ruslan and Masih, Mansur (2013): The Role of Gold as a Hedge and Safe Haven in Shariah-Compliant Portfolios.

Abstract

The paper is the first attempt to evaluate the role of gold as a hedge (negative or low correlation with equities in normal market conditions) and safe haven (negative or low correlation in times of market turbulence) by using the daily data for gold and Shariah-compliant equities ranging from January 1996 to April 2013, and comparing between developed and emerging markets in time-frequency domain. Wavelet Coherence technique is applied to identify the best time-frequency for gold as a hedge, and MGARCH-DCC to find out the reaction of gold to unfavorable market conditions as a safe haven. The results tend to indicate that gold maintains its capacity as hedging instrument at higher time-scales, while during the financial crisis it demonstrated a weak form of safe haven by showing almost zero correlation with the Shariah-compliant equities.

• Item Type: MPRA Paper
• Language: English
• Keywords: Gold, shariah-compliant equities, wavelet coherence, MGARCH-DCC
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions

References

Baur, D., and Lucey, B. (2010). Is gold a hedge or safe haven? An analysis of stocks, bonds and gold. Financial Review, 45, 217–229.

Baur, D. G., and McDermott, T. K. (2010). Is gold a safe haven? International evidence. Journal of Banking and Finance, 34, 1886–1898.

Ciner, C., Gurdgiev, C. and Lucey, B.M. (2013). Hedges and safe havens: An examination of stocks, bonds, gold, oil and exchange rates. International Review of Financial Analysis. 29, 202 – 211.

Christie, A.(1982). The Stochastic Behavior of Common Stock Variances-Value, Leverage and Interest Rate Effects. Journal of Financial Economics, 10, 407-432

Garefalakis, A., Dimitras, A., Koemtzopoulos, D. and Spinthiropoulos, K. (2011). Determinant Factors of Hong Kong Stock Market.

Ghosh, D., Levin, E.J., Macmillan, P. and Wright, R.E. (2004). Gold as an inflation hedge? Studies in Economics and Finance. 22(1).

Ibrahim, M. H. (2012). Financial market risk and gold investment in an emerging market: the case of Malaysia. International Journal of Islamic and Middle Eastern Finance and Management, 5(1), 25-34.

Hillier, D., Draper, P. and Faff, R. (2006) Do precious metals shine? An investment perspective. Financial Analysts Journal, 62 (2), 98.

Hood, M. and Malik, F.(2013). Is gold the best hedge and a safe haven under changing stock market volatility? Review of Financial Economics, 22, 47 – 52.

Kaul,A. and Sapp,S.(2006). Y2K fears and safe haven trading of the US dollar. Journal of International Money and Finance 25, 760–779

McCown, J.R. and Zimmerman, J.R. (2006). Is gold a zero-beta asset? Analysis of the investment potential of precious metals. Available from SSRN: <http:// ssrn.com/abstract=920496>

Reboredo, J.C.(2013). Is gold a hedge or safe haven against oil price movements? ELSEVIER: Resources Policy 38 (2013), 130-137.

Sari, R., Hammoudeh, Sh., and Soytas, U. (2009). Dynamics of oil price, precious metal prices, and exchange rate. ELSEVIER: Energy of Economics 32 (2010), 351-362

Tully, E., and Lucey, B. M. (2007). A power GARCH examination of the gold market. Research in International Business and Finance,21(2), 316–325

Wang, K., Lee, Y., and Thi, T.N. (2011). Time and place where gold acts as an inflation hedge: An application of long-run and short-run threshold model. ELSEVIER: Economic Modeling 28 (2011), 806-819.

Ziaei, S.M. (2012) Effects of gold price on equity, bond and domestic credit: Evidence from ASEAN +3. ELSEVIER: Procedia - Social and Behavioral Sciences 40 (2012), 341-346