Linkages between gold and Latin American equity markets: portfolio implications.
| Autor | Yousaf, Imran |
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Introduction
The stock markets are crucialinthe optimal allocation and mobilizationof financial resources to support economic activities (Carp, 2012). In the past, the stock markets were adversely affected by several financial crises (Bouri, 2015; Umar et al., 2021b), and investors suffered massive losses. Investors are always searching for alternate assets/safe haven that can diversify the risk of stocks portfolios during crises episodes. Gold is considered as the safe-haven investment against the equities during the huge uncertainty phases of the markets (Baur and McDermott, 2010). Therefore, it is important to examine the gold-stock nexus during the crisis's episodes to provide valuable insights to the investors and portfolio managers regarding diversification opportunities, hedging and portfolio allocation (Arouri et al., 2015).
Our research intends to investigate the mean and volatility links across gold assets and rising Latin American (LA) equity markets during various sample periods, including the full-sample period, the US financial crisis (UFC) and the Chinese equity market crash (CSMC). These linkages answer the important research question of whether gold can diversify the equity risk of LA equity markets during different sample periods. This study also computes the optimal portfolio-weights and hedge-ratios for gold and stock-based portfolios to provide information about optimal portfolio allocation, downside risk reduction and hedging during the crisis periods (Hammoudeh et al., 2014; Andreasson et al., 2016).
Several studies have explored the gold-stock nexus during the UFC (Arouri et al., 2015; Junttila et al., 2018; Yousaf et al., 2020a, 2021); however, studies are scant in the context of CSMC. The Chinese equity market crashed in 2015 (Han and Liang, 2017; Yousaf and Hassan, 2019), the CSI-300 index dropped 34% in just 20 days at the start of the crisis. The Chinese equity market lost around 50% of the pre-crash market value and affected many emerging markets, including the emerging LA equity markets [1]. Trade and financial integration are directly associated with each other, and China is the major trading partner of LA economies, therefore the CSMC can influence the LA equity markets (Mata and Mora, 2016; Yousaf et al., 2020b).
The contribution of the current study is threefold. Firstly, as per our best understanding and published evidence, it is the first research that examines the return and volatility spillover between gold and LA equity markets during crisis periods, especially in the CSMC. However, literature provides the evidence of various studies that examines return/volatility transmission between world stock markets and gold (Badshah et al., 2013; Arouri et al., 2015; Gao and Zhang, 2016; Balcilar et al., 2018; Kang and Yoon, 2019; Jiang et al., 2019; Akkoc and Civcir, 2019; Adewuyi et al., 2019). Because none of the aforementioned research investigates the return/volatility relationships between gold and LA equity markets during the CSMC, therefore this study fills this literature gap.
Second, we estimate the spillovers employing the VAR-BEKK-GARCH model. This model is utilized in different studies for the analysis of return and volatility spillovers (Chen et al., 2020; Yu et al., 2020; Ahmed and Huo, 2021). Several studies also use the Wavelet approach and Diebold and Yilmaz approach for spillovers analysis (Umar et al., 2021a, c; Al-Yahyaee et al., 2019). The competitive models (i.e. DCC-GARCH and VAR-GARCH) suffer from convergence issues (Zhang and Choudhry, 2017; Yousaf and Ali, 2021). Moreover, the VAR-BEKK-GARCH model can estimate the conditional volatilities, covariances, time-varying correlation, which are utilized to compute hedge ratios using optimal weights. Finally, this research also augments the literature by providing the hedge ratios and optimal weights for the gold-stock pairs. The remainder of the paper is structured as follows: Section 2 describes the data and methodology. Section 3 provides the findings of this study. Finally, Section 4 concludes the whole research.
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Literature review
A large amount of research has been conducted around the world to study the gold-stock nexus. Smith (2001) investigates the link between gold and the US equity market and reports a significant unidirectional causal impact from US equity returns to gold returns. Lawrence (2003) investigates the association between S&P 500 index, gold and other commodities. He finds that gold returns are weakly associated with S&P 500 returns as compared to the association between S&P 500 and other commodities. Mishra et al. (2010) investigate the volatility of gold price and Indian equity market returns and confirm a bidirectional relationship. Choi and Hammoudeh (2010) empirically find that gold and S&P 500 index have a very low correlation.
Miyazaki and Hamori (2013) study the links between the equity and gold markets. They find that unidirectional return spillover from equity to gold but report no evidence of volatility spillover between equity to the gold market. Before the crisis, bidirectional causality exists while unidirectional causality in mean and variance exists from equity to gold market after the crisis. In addition to that, Thuraisamy et al. (2013) examine the volatility spillover effect between fourteen Asian equity markets to the two commodities gold futures and crude oil markets. The study finds that spillover results of mature and immature markets are different from each other. In mature markets like Japan, volatility effects are transmitted to gold future and crude oil markets from the Japanese equity market. In comparison, the volatility effects are transferred from commodity futures to the equity markets in immature economies. Moreover, there is a presence of a bidirectional volatility transmission during the financial crisis.
During the global financial crisis, Arouri et al. (2015) discover a strong presence of return and volatility spillovers between gold and Chinese equity markets. While studying the relationship between gold and stock price of BRICS economies, Raza et al. (2016) confirm that the contribution of gold prices to the equity returns is positive. Furthermore, they argued that the relationship is negative for gold and equity markets of Malaysia, Chile, Thailand, Indonesia and Mexico. In line with the studies mentioned above, Bekiros et al. (2017) confirm the diversifier role of gold for BRICS stock markets.
Vardar et al. (2018) confirm that volatility is transmitted from developed and emerging equity markets to the gold market. Moreover, Shakil et al. (2018), through an autoregressive distributed lag model (ARDL), discovered that gold is useful as a portfolio hedge because it is not affected by the consumer price index. They found that external factors as the financial crisis may be harmful to the consumer price index. Thus, adding a percentage of gold to the investment portfolio may reduce the risk level. Using data from the Turkish equity market, Akkoc and Civcir (2019) discovered a significant unidirectional volatility transmission from gold and oil. Al-Yahyaee et al. (2019) find that the precious metals provide more diversification opportunities against the GCC stocks than the energy markets. While studying the Indian equity market, Maitra and Dawar (2019) report that the unidirectional return spillover from the commodity to the Indian equity market. Singhal et al. (2019) find that international gold prices have a substantial positive impact on Mexican equity prices.
Yamaka and Maneejuk (2020) find a stronger integration between gold and Asian stocks markets during the UFC than pre- and post-crisis. While examining the quantile connectedness between BRICS equity markets and gold, Naeem et al. (2020) confirm the diversifier role of gold against the BRICS equity markets. He et al. (2020) look at the linkages between gold and the US and the China equity markets and report that the US and Chinese equity markets are the net recipients of volatility effects from the gold market. Moreover, the gold market volatility positively (negatively) influences the volatility of the US (China).
Morema and Bonga-Bonga (2020) provide evidence of bidirectional volatility spillover between South African equity markets, gold and oil. Hung and Vo (2021) report the strong connectedness between oil, gold and equity markets during COVID-19 compared to the pre-pandemic period. Mensi et al. (2021) investigate the asymmetric spillovers between the oil, gold and Chinese equity market and find that the negative return spillover dominates the positive return spillovers. Moreover, the connectedness between these markets varies during UFC, oil-price crash and the pandemic period. According to the aforementioned literature, none of the studies have explored the return and volatility transmissions between the gold and LA equity markets during crises; consequently, this study substantially contributes to the current body of knowledge by filling up the gaps described above.
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Data and methodology
3.1 Data
To examine the gold-stock nexus, this study uses daily data from January 2000 to June 2018. Following MSCI emerging market index, this study sample consisted of four emerging LA equity markets: Brazil, Mexico, Chile and Peru. The data is further divided into two subsamples (1) the UFC - which starts in August 2007 and ends in July 2010) and (2) the CSMC - which starts in June 2015 and ends in May 2018. The three-year span is used for each crisis, as used by Yousaf and Hassan (2019). On non-trading days, the index value is assumed to be the same as the previous trading day. The data pertaining to equity indices have been extracted from the Data Stream database. To examine spillover between gold and equity returns, the data of daily London gold spot prices (in the US dollars per troy ounce) has been taken from the London Bullion Market Association homepage (Santillan Salgado et...
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