Investor Sentiment and Crash Risk in Safe Havens

Adnen Ben Nasr,Riza Demirer,Matteo Bonato,Rangan Gupta

doi:10.22610/jebs.v10i6a.2666

Abstract

This study examines the relationship between investor sentiment and intraday return dynamics for safe haven assets, with a particular focus on crash risk in these assets. Examining intraday returns for a wide range of safe havens proposed in the literature, we find that shocks to investor sentiment have a significant effect on safest havens, while the sentiment is heterogeneous both in terms of its size and direction. While the strongest effects of sentiment shocks are observed in the case of Gold, Swiss Francs and Japanese Yen, interestingly, we find that oil stands out from the rest of the pack, responding negatively to sentiment shocks, suggesting that positive shocks to sentiment (i.e. high fear) increase crash risk for this asset. Our findings also point to intra-safe haven spillover effects, with oil exhibiting a markedly different pattern. Investment and hedging implications are discussed next.

Highlights

Research on safe haven assets has recently gained momentum, following the 2007/2008 global financial crisis
Our findings point to a sentiment effect on intraday return dynamics for most safe havens while the effect is rather heterogeneous, both in terms of the size and the direction
The literature on safe havens has experienced tremendous growth over the past decade, following the historic market turbulence experienced during the global financial crisis of 2007/08

Summary

Introduction

Research on safe haven assets has recently gained momentum, following the 2007/2008 global financial crisis. Numerous studies over the past several years examined the safe haven and hedging benefits of alternative assets for stock and bond investors, during periods of market turbulence.. The only exception to this is a recent study by (Balcilar, Bonato, Demirer, & Gupta, 2017) establishing a link between investor sentiment and intraday volatility jumps in the gold market. Building on this evidence, this study examines the role of investor sentiment across a wide range of safe haven assets proposed in the literature and looks into whether or not investor sentiment can explain crash and bubble risks in these assets.

Brief Review of the Literature on Safe Havens

Data and Methodology

Empirical Results

Conclusion