Abstract
During periods of market stress, risk-averse investors reallocate their investments from stocks to gold in a bid to hedge risks. Market participants interpret the induced gold price increase as an indication of safe-haven purchases and a signal of increased uncertainty in the general economic and financial conditions, thereby causing higher gold price volatility. The aim of this paper is to analyze whether this flight to safety effect can be observed during the COVID-19 crisis, which is considered to be a one-of-a-kind crisis and obviously of different origin compared to previous (financial) crises. By examining the interactions between the (option-implied) volatilities of the stock market (VIX) and of the gold (GVZ) and oil (OVX) markets, the main findings indicate that there is a granger causality in general between the equity market and the gold as well as the oil market. During the COVID-19 crisis, a stronger influence of the equity market on the oil market can be observed. Based on symmetric causality tests that are typically employed in the literature, this cannot be observed for the gold market. However, once we control for asymmetric causal interactions, we find that positive shocks in VIX cause positive shocks in GVZ. Hence, the typical flight to safety effect, similar to the one observed during other (financial) crises can also be identified for the COVID-19 crisis. The causality between the equity and oil market is triggered by political factors as well as the economic impact of the crisis which induces a sharp drop in demand for oil.
Highlights
Introduction and aim of the paperSince the outbreak of COVID–19, global markets have been shaken due to the impact of the pandemic on the economy
The aim of this paper is to analyze the interdependencies between the implied volatility changes in the oil price, the gold price and the equity market, and to establish whether the flight to safety effect can be observed during the COVID-19 Crisis, which is considered to be a one-of-a-kind crisis and obviously of different origin compared to previous crises
This paper mainly focuses on market developments in the U.S, since the S&P 500, which is based on U.S companies, is the basis for the Volatility Index (VIX) calculation and West Texas Intermediate crude oil is the basis for the calculation of Oil ETF Volatility Index (OVX)
Summary
Since the outbreak of COVID–19, global markets have been shaken due to the impact of the pandemic on the economy. Curfews and lockdowns have dragged the global economy into recession. The majority of SME’s, small businesses and startups are facing an existential crisis through unprecedent insolvency and behavioral changes in demand, but the same applies on mature businesses (i.e., airlines, hospitality, and leisure), which are at risk of bankruptcy. The coronavirus pandemic and resulting recession have severely amplified trends that were already at work in the global economy, but how it evolves from here is a big unknown.
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