Abstract
In this study, I apply a quantile regression model to investigate how gold returns respond to changes in various financial indicators. The model quantifies the asymmetric response of gold return in the tails of the distribution based on weekly data over the past 30 years. I conducted a statistical test that allows for multiple structural changes and find that the relationship between gold return and some key financial indicators changed three times throughout the sample period. According to my empirical analysis of the whole sample period, I find that: (1) the gold return rises significantly if stock returns fall sharply; (2) it rises as the stock market volatility increases; (3) it also rises when general financial market conditions tighten; (4) gold and crude oil prices generally move toward the same direction; and (5) gold and the US dollar have an almost constant negative correlation. Looking at each sample period, (1) and (2) are remarkable in the period covering the global financial crisis (GFC), suggesting that investors divested from stocks as a risky asset. On the other hand, (3) is a phenomenon observed during the sample period after the GFC, suggesting that it reflects investors’ behavior of flight to quality.
Highlights
Correlations across different asset classes increased during the global financial crisis (GFC) of 2007–2009, and diversification effects did not work when most needed
GOLDt = β0 + ∑ βiGOLDt−i + β6SPXt + β7SPVOLt + β8FSI1t + β9WT It+β10TWEXt + et (5) i=1 where GOLD is gold return, SPX is S&P 500 Index return, SPVOL is S&P 500 Index return volatility, FSI1 is the degree of financial market stress, WTI is return on West Texas Intermediate, TWEX is the appreciation/depreciation rate of the US dollar, βj (j = 0, · · ·, 10) is the parameters to be estimated, and e is the error term
Full Sample Period Our quantile regression model corresponding to Equation (5) is given by, GOLD(τ)t = β0(τ) + ∑ βi(τ)GOLDt−i + β6(τ)SPXt + β7(τ)SPVOLt + β8(τ)FSI1t i=1 (6)
Summary
Correlations across different asset classes increased during the global financial crisis (GFC) of 2007–2009, and diversification effects did not work when most needed. With the financialization of commodities from the first half to the middle of the 2000s as cross-market linkages increased, many commodity prices plunged along with the stock market crash.1 This experience makes us recognize the importance of accurately grasping the linkages or contagion between different asset classes, and promote studies that unravel the transmission mechanism and spillover effect between different asset markets (see, e.g., Chudik and Fratzscher 2011; Diebold and Yilmaz 2012; Ehrmann et al 2011; Guo et al 2011; Longstaff 2010). Gold is generally seen as distinct from other traditional assets due to its special character It is often regarded as a safe haven, especially hedging against the downside risk of stocks or in times of financial turbulence. Academic research on gold as an investment asset has been increasing in recent years (see, for example, O’Connor et al 2015)
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