Gold and Government Bonds as Safe-Haven Assets Against Stock Market Turbulence in China

Wei Huang,Meng-Shiuh Chang

doi:10.1177/2158244021990655

Wei Huang, Meng-Shiuh Chang

Open Access

https://doi.org/10.1177/2158244021990655

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Abstract

We examine whether gold and China’s government bonds are safe-haven assets against the turbulence of the Shanghai Stock Exchange Composite Index by employing vine copula models during the 2003 to 2015 period. We find that either bonds or gold can be a weak safe haven but only gold can be a strong safe haven. Our simultaneous analysis advises against a joint safe-haven strategy of gold and bonds, given the high- to low-tail correlation. This result highlights an investment strategy of using a single safe-haven asset against the Chinese stock market turbulences.

Highlights

Extreme market conditions have reminded investors of the essentialness of risk management
Conventional wisdom holds that assets such as government bonds and gold are safe havens in bad times in the United States and the European Union (e.g., Baur & Lucey, 2010; Baur & McDermott, 2010; Connolly et al, 2005; Longstaff, 2004)
Dee et al (2013) revealed that gold was not a safe haven in China’s capital markets but Gürgün and Unalmis (2014), Arouri et al (2015), and Beckmann et al (2018) demonstrated that gold performed as a weak safe haven for Chinese stock markets

Summary

Introduction

Extreme market conditions have reminded investors of the essentialness of risk management. To the best of our knowledge, no extant studies have simultaneously considered the extreme dependence among multiple safehaven assets with respect to the Chinese stock market. We employ the multivariate model to test whether bonds (gold) acts as a strong safe-haven asset when gold (bonds) is in extreme (good or bad) market conditions. By examining the unconditional and conditional joint lower tailed probabilities of stocks, bonds, and gold, we conclude that neither bonds nor gold can be a reliable safe haven; their effectiveness as a safe-haven asset depends on the alternative investment. The results show that the estimated lower tailed dependence coefficient of the combination of all three assets is larger than that of bonds–stocks and that of gold–stocks, implying that a portfolio including multiple safe havens does not dominate that including a single safe haven.

Literature Review

Estimation Procedure

Findings

Conclusion