Testing the role of gold in crisis: a global perspective

Abstract

During the period of extreme financial turmoil, investors will include hedge and safehaven assets in their portfolios. The present study looked at the dynamic link between gold return and the world stock return during crises. The study examined the conditional correlation between world stock and gold return. It investigated the usefulness of gold as a safe haven for stocks in the bear markets from January 2001 to June 2021 using daily MSCI stock index and gold price data. The crisis period is defined as the bear stock market in the present study, and bear markets were identified using the algorithm of Pagan and Sossounov (2003). Seven bear markets were identified for the purpose of the study. A combination of the DCC-GARCH model and OLS regression were employed to determine the relationship between gold and the MSCI world stock index. The study found that the dynamic conditional correlations are primarily negative in the bear markets under investigation. Gold performs the role of a safe haven for all bear markets except for the bear market from 2004-02-27 to 2004-06-30. It was concluded that gold acts as a robust, safe haven during turmoil and safe haven property depends on the severity of stock price changes. The findings have implications for policymakers and investors.