Is gold a hedge against equity risk? Malaysian experience based on NARDL approach

Sabry, Saajid and Masih, Mansur (2018): Is gold a hedge against equity risk? Malaysian experience based on NARDL approach.

Abstract

The chain of financial crises that had been occurring raised a serious concern among the investors regarding its equity risk. There is a need to rethink about gold as a hedge against its equity risk in the long run. Hence, the question is whether gold is a good hedge against equity risk? We use a recently developed time series technique namely, nonlinear ARDL (NARDL) to test the long term asymmetric relationship between gold price and Kuala Lumpur Composite Index. To the best of our knowledge, this would be the first attempt to use NARDL to look into the long run asymmetric relationship between these variables. Our results tend to suggest that gold price in the Malaysian context is determined by external factors, specifically cultural preferences. Also, it has a negative relationship making gold a good hedge against equity risk. This finding would be important for the investors to consider to have gold in their portfolio to hedge against equity risk in Malaysia.

• Item Type: MPRA Paper
• Language: English
• Keywords: Malaysia, Emerging markets, Gold, Investments, Stock markets, Gold investment, NARDL
• 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.G., McDermott, T.K., (2010). Is gold a safe haven? International evidence. Journal of Banking & Finance, 34 (8), 1886–1898.

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), 217–229.

Dickey, D. A., & Fuller, W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 74, 427-431.

Dickey, D. A., & Fuller, W. A. (1981). Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica, 49(4),1057-1072.

Engle, R. F., & Granger, C. W. (1987). Co-integration and error correction: representation, estimation, and testing. Econometrica, 52(2), 251-276.

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.

Johansen, S. (1991). Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models. Econometrica, 59, 1551-1580.

O’Connor, F.A., Lucey, B.M., Batten, J.A., Baur, D.G., (2015). The financial economics of gold – a survey. International Review of Financial Analysis, 41, 186–205.

Pesaran M H and Shin Y (1999) ‘An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis’ in S Strom, (ed.), Econometrics and Economic Theory in the 20th Century: The Ragnar Frisch Centennial Symposium, Cambridge: Cambridge University Press.

Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289-326.

Phillips, P. C., & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75(2), 335-346.

Shin, Y., Yu, B., and Greenwood-Nimmo, M. (2014). Modelling asymmetric cointegration and dynamic multipliers in a nonlinear ARDL framework. In Horrace, W.C. and Sickles, R. C.(eds), Festschrift in Honor of Peter Schmidt. Springer Science & Business Media, New York, 281-314