Gold's hedging and safe haven properties for European stock and bond markets

Most portfolio managers and risk managers strive to pick assets that lead to efficient financial risk mitigation; among them, gold stands out. This paper provides new insights into the role of gold as both a hedge and a safe haven towards European stock and sovereign bond markets. We base the analysis on evidence spanning the Euro's inception to the COVID-19 pandemic spread across Europe. To capture gold's hedge ability, we use the ADCC-GARCH and DCC-GARCH models, while for testing gold's safe haven property we use OLS regressions for different quantiles. Our results show that gold is a hedge for stocks, particularly after the Lehman Brothers collapse. Gold also shows strong safe haven properties for the most extreme negative returns (1% and 2.5% quantiles), and during specific events, such as the Lehman Brothers collapse, the Greek bailout and the Brexit Referendum. Still, for the COVID-19 pandemic outbreak, the results do not confirm this property. Conversely, for bonds, both hedge and safe haven effects are not strongly evident, with gold characterised, at best, as a weak hedge and safe haven. These findings have portfolio allocation implications for investors in European markets, namely fund and risk managers, by pointing out gold hedging and safe haven attributes.

Automated summary

This paper examines the role of gold as a hedge and safe haven in European stock and sovereign bond markets. The analysis, based on evidence spanning from the Euro's inception to the COVID-19 pandemic, reveals that gold acts as a hedge for stocks, particularly after the Lehman Brothers collapse. It also demonstrates strong safe haven properties for extreme negative returns and specific events like the Lehman Brothers collapse, Greek bailout, and Brexit Referendum. However, the results do not confirm gold's safe haven property during the COVID-19 outbreak. For bonds, gold is characterized as a weak hedge and safe haven. These findings have important implications for portfolio allocation in European markets, especially for fund and risk managers.