Return and volatility transmission between gold and stock sectors: Application of portfolio management and hedging effectiveness

Dilip Kumar

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Financial Risk and Volatility Modeling Financial Markets and Investment Strategies Market Dynamics and Volatility

Abstract

The paper investigates the first and second orders moment transmission between gold and Indian industrial sectors with an application of portfolio design and hedging effectiveness using generalised VAR-ADCC-BVGARCH model. Our findings indicate unidirectional significant return spillover from gold to stock sectors. The negative values of estimated time varying conditional correlations are mainly observed during periods of market turbulence and crisis indicating the scope of portfolio diversification and hedging during these periods. We also estimate optimal weights, hedge ratios, and hedging effectiveness for the stock-gold portfolios. Our findings suggest that stock-gold portfolio provides better diversification benefits than stock portfolios.

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References

2002Dynamic Conditional Correlation 2001LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power 1988Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test 2010Is Gold a Hedge or a Safe Haven? An Analysis of Stocks, Bonds and Gold 1998Modeling Asymmetric Comovements of Asset Returns 1993Time-Varying Distributions and Dynamic Hedging with Foreign Currency Futures 2003ASYMPTOTIC THEORY FOR A VECTOR ARMA-GARCH MODEL 2005Gold as a hedge against the dollar

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