Abstract
In this study, we estimate the conditional correlation and coskewness between gold and stock returns using a bivariate regime-switching model. Motivated by Yang, Zhou, and Wang (2010), we define gold as a strong hedge if the average correlation is negative and the coskewness is positive in the sample. Gold is a strong safe haven if these hold under market turmoil. We empirically examine the property of gold in 24 countries for a sample period spanning over 40 years and find that gold acts as a strong hedge and safe haven in Brazil, India, Indonesia, Italy, Mexico, Russia, South Korea, and Turkey. The interplay between cultural characteristics and the state of financial markets collectively defines gold's role in various countries. We construct a conditional comoment-based dynamic trading strategy and add gold to the stock portfolio when it can serve as a hedge or safe haven. Its out-of-sample performance dominates the buy-and-hold and correlation-based strategies, especially when we consider the safe haven property of gold.
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