Is gold good for hedging? lessons from the Malaysian sectoral stock indices

Rahim, Yasmin and Masih, Mansur (2015): Is gold good for hedging? lessons from the Malaysian sectoral stock indices.

Abstract

Econometricians had been blamed for the financial crises that occurred due to their giving a ‘false hope’ to investors and policy makers using untested theoretical assumptions. Therefore, econometricians had been challenged to reform their studies by grounding them more solidly on reality. The theory of Markowitz 1952 in the context of investment portfolio urged the investor ‘not to put all eggs in one basket’ implying to diversify their investment portfolio as a mechanism to minimize the risk. Controversies pertaining to the role of gold and its stability to diversify the investment portfolio had been raised and had been puzzling the investors till to date. Normally, the variable used to represent the stock index of a country is in terms of indices and very limited research is found to apply sectoral indices. Therefore, this research is an humble attempt to examine the correlation and causality between the Malaysian sectoral stock indices and gold applying multivariate standard time series techniques using monthly observations ranging from January 2007 until September 2014. We found that gold was the most independent (exogenous) variable compared to the sectoral stock indices even during the 2008 financial crisis period and the most dependent sectors were construction and financial. Therefore, we believe that gold could be a hedging instrument against these sectors. Hence, we humbly suggest to the investors and investment portfolio managers to include gold as part of their investment portfolios.

• Item Type: MPRA Paper
• Language: English
• Keywords: sectoral stock indices, gold, Granger-causality, time series techniques
• 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; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions

References

Baur, D. G., & Lucey, B. M. (2010). Is gold a hedge or a safe haven? An analysis of stocks, bonds and gold. Financial Review, 45(2), pp 217-229.

Colander, D., Goldberg, M., Haas, A., Juselius, K., Kirman, A., Lux, T., & Sloth, B. (2009). The financial crisis and the systemic failure of the economics profession. Critical Review: A Journal of Politics and Society, 21:2-3, pp 249-267, doi: 10.1080/08913810902934109

Evan, J. L., & Archer, S. H. (1968). Diversification and the reduction of dispersion: An empirical analysis. Journal of Finance, 23(5), pp 761-767, doi: 10.1111/j.1540-6261.1968.tb00315.x

Jaffe, J. F. (1989). Gold and gold stocks as investments for institutional portfolio. Financial Analyst Journal, 45(2), PP 53-59.

Johnson, R., &Soenan, L. (1997). Gold as an investment asset: Perspectives from different countries. Journal of Investing, 6(3), pp 94-99. doi: 10.3905/joi.1997.408427

Lawrence, C. (March,2003). Why is gold different from other assets? An empirical investigation. London, United Kingdom: World Gold Council. Retrieved at:http://www.spdrgoldshares.com/media/GLD/file/colin_lawrence_report.pdf

Statman, M. (1987). How many stocks make a diversified portfolio? Journal of Financial and Quantitative Analysis, 22(3), pp 353-363, doi: //dx.doi.org/10.2307/2330969