Dirk G. Baur

Is Gold a Hedge or a Safe Haven? an Analysis of Stocks, Bonds and Gold

Is gold a hedge, defined as a security that is uncorrelated with stocks or bonds on average, or is it a safe haven, defined as a security that is uncorrelated with stocks and bonds in a market crash? We study constant and time-varying relations between U.S., U.K. and German stock and bond returns and gold returns to investigate gold as a hedge and a safe haven. We find that gold is a hedge against stocks on average and a safe haven in extreme stock market conditions. A portfolio analysis further shows that the safe haven property is short-lived.

Flights and Contagion - an Empirical Analysis of Stock-Bond Correlations

This paper analyzes the existence of flights from stocks to bonds and vice versa. We propose a definition and a test for flight-to-quality, flight-from-quality and cross-asset contagion and examine their characteristics and effects for the financial system. The empirical analysis for eight developed countries including the US, the UK, Germany and Japan shows that flights exist and are a common feature in many crises episodes. Our findings also reveal that flights are not merely country-specific events but occur simultaneously across countries. This indicates that there is a link between the occurrence of flights and cross-country contagion. Moreover, we show that flights enhance the resiliency of the financial markets by providing diversification benefits in times when they are needed most.

Coexceedances in Financial Markets - A Quantile Regression Analysis of Contagion

This paper analyzes simultaneous exceedances (coexceedances) of several stock index returns for different thresholds with a focus on the Asian crisis in 1997. We introduce a new concept of computing and estimating time-varying coexceedances and use the quantile regression model to analyze contagion. We find contagion (i.e. more and larger coexceedances) during the Asian crisis among countries and also across regions. The results are based on a comparison of coexceedances of the full period to a benchmark period conditional on certain regimes of extreme market movements. An analysis of the evolution of coexceedances also reveals the time-varying character of contagion. Conditional density estimates additionally point to the existence of multiple equilibria in crisis periods.

Asymmetric Volatility in the Gold Market

The volatility of equity returns generally exhibits an asymmetric reaction to positive and negative shocks. Economic explanations for this phenomenon are leverage and a volatility feedback effect. This article studies the volatility of gold and demonstrates that there is an inverted asymmetric reaction to positive and negative shocks—positive shocks increase volatility more than negative shocks. The author argues that this effect is related to the safe-haven property of gold. Investors interpret positive gold price changes as a signal for future adverse conditions and uncertainty in other asset markets. This introduces uncertainty in the gold market and thus higher volatility. The empirical results hold for gold bullion and gold coins denominated in different currencies and for different return frequencies, sample periods, and distributional assumptions. Finally, the author shows that the inverted volatility effect of gold can lower the aggregate risk of a portfolio for specific correlation levels.

A Flexible Dynamic Correlation Model

Existing multivariate generalized autoregressive conditional heteroskedasticity (GARCH) models either impose strong restrictions on the parameters or do not guarantee a well-defined (positive-definite) covariance matrix. I discuss the main multivariate GARCH models and focus on the BEKK model for which it is shown that the covariance and correlation is not adequately specified under certain conditions. This implies that any analysis of the persistence and the asymmetry of the correlation is potentially inaccurate. I therefore propose a new Flexible Dynamic Correlation (FDC) model that parameterizes the conditional correlation directly and eliminates various shortcomings. Most importantly, the number of exogenous variables in the correlation equation can be flexibly augmented without risking an indefinite covariance matrix. Empirical results of daily and monthly returns of four international stock market indices reveal that correlations exhibit different degrees of persistence and different asymmetric reactions to shocks than variances. In addition, I find that correlations do not always increase with jointly negative shocks implying a justification for international portfolio diversification.

Stock-bond co-movements and cross-country linkages

This study analyses the correlation of stock and bond indices for eight developed countries. We compare a countrys stock-bond linkages with cross-country linkages and find that the former exhibit a negative trend in contrast to the positive trend observed for cross-country stock market and bond market linkages. We show that the decline of the stock-bond correlation in recent years can be explained with a more frequent portfolio rebalancing of investors due to the globalisation of securities markets and implied lower international diversification benefits across similar asset classes. A test for temporal commonalities of changes in cross-country and stock-bond linkages indicates that flight-to-quality from stocks to bonds and cross-country stock market contagion occurs simultaneously.

The Destruction of a Safe Haven Asset

Gold has been a store of value for centuries and a safe haven for investors in the past decades. However, the increased investment in gold for speculative or hedging purposes has changed the safe haven property. We demonstrate theoretically and empirically that investor behaviour has the potential to destroy the safe haven property of gold. The results suggest that an asset cannot be both an investment asset and an effective safe haven asset. This finding has important implications for financial stability since assets are more likely to exhibit excess comovement and volatility in the absence of a safe haven.

Does the Mobility of Football Players Influence the Success of the National Team

This paper is motivated by the observation that there is a large discrepancy among football nations regarding the number of football players that play in the national team and also in their home league. Two extreme examples are Argentina and Italy : Almost all members of the national team of Argentina play in a foreign football league and all national team players of Italy play in their home league. We focus on the question whether a countrys success in international competitions significantly depends on the mobility of its football players. More specifically, we analyze whether a countrys success is influenced (i) by the number of national team players that do not play in the home league and (ii) by the number of national team players from other countries that play in the home league. Our study is based on data of all 32 national football teams qualified for the FIFA World Cup in Germany 2006 including more than 700 players with a total estimated market value of almost four billion Euros. The main finding is that a countrys success crucially depends on both imports and exports. This suggests that all countries that qualified for the World Cup gain from trade.

What is Co-movement?

This paper proposes a definition of bivariate and multivariate co-movement and an associated measure that precisely reflects its definition. It is shown that co-movement as defined in this paper is a copula property. We employ a truly multivariate and dynamic analysis and analyze whether co-movements have increased through time, in crisis periods and whether there are differences between normal and extreme co-movements. Empirical results for different portfolios of monthly stock market returns generally show that positive and negative co-movements have increased in recent years. However, in crisis periods co-movements have not always increased. Furthermore, while normal co-movements have increased for all portfolios, extreme co-movements have increased for some markets but not for all. Finally, the results clarify that the multinomial logit model used to estimate the probability of co-movement can be viewed as an alternative to Multivariate GARCH models.

Momentum in the Irish Stock Market

This article is the first to study momentum trading strategies in the Irish stock market. The findings can be summarized as follows: (i) unconditional momentum trading strategies do not outperform the market, (ii) winner and loser trading strategies do outperform the market and (iii) controlling for heteroscedasticity significantly changes the results and yields positive and significant excess returns for most of the 16 momentum trading strategies analysed. These findings illustrate that investors can persistently earn excess returns in the Irish stock market.