Scribd
Upload
12 views

turnitin_replace

Markwat et al. (2009) explore the contagion dynamics of financial crises and the role of gold as a safe haven asset during such times. Their analysis, covering 30 years of data from 53 international stock markets, finds that gold acts as a strong safe haven in several developed markets, while also investigating the impact of currency movements on this property. The paper emphasizes gold's historical significance as a store of value and its effectiveness in protecting wealth during extreme market conditions.

Uploaded by

ikmal hakim
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
12 views

turnitin_replace

Markwat et al. (2009) explore the contagion dynamics of financial crises and the role of gold as a safe haven asset during such times. Their analysis, covering 30 years of data from 53 international stock markets, finds that gold acts as a strong safe haven in several developed markets, while also investigating the impact of currency movements on this property. The paper emphasizes gold's historical significance as a store of value and its effectiveness in protecting wealth during extreme market conditions.

Uploaded by

ikmal hakim
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

Markwat et al.

(2009) find evidence of a domino effect that causes local crises to


propagate to the regional or even global level, threatening the stability of the
financial system. Such contagion
dynamics present a strong motivation for investors to seek out a safe haven asset in
times of financial crisis. Calvo and Mendoza (2000) find that investors faced with
losses in emerging markets will tend to shift their portfolios towards the average
portfolio, reflecting investors’ concerns not only about returns in absolute terms, but
also relative to the performance of other investors. This may explain the qualitative
difference in our results for developed versus emerging markets.
A separate strand of the literature, known as the flight to quality literature,
emphasizes investors’ movements from stocks to bonds in response to negative
market shocks (see for example Gulko, 2002; Hartmann et al., 2004). We aim to
examine the role of gold as an alternative ‘quality’ asset in times of severe market
stress.
1.3. Main contributions of paper
With the exception of Baur and Lucey (forthcoming) none of the above literature
explicitly examines the role of gold as a safe haven against losses in financial
markets. This paper builds on the work of Baur and Lucey (forthcoming), by
extending the analysis in a number of important ways. We look at investor reactions
to varying degrees of ‘stormy weather’. Our dataset allows us to differentiate
between ‘storms’ of various sizes, in terms of both the severity2 and the duration3
of shocks to the financial system. We also pursue a multi-country analysis, using
major emerging and developed countries from a sample of 53 international stock
markets, thus allowing us to test the safe haven effect across a broad cross-section
of world stock markets. Our data cover a 30 year period from March 1979 to March
2009.
We also broaden the research approach, by examining two further questions related
to the safe haven property and the role of gold in the global financial system: (i) to
what extent does gold protect wealth during extreme market conditions, i.e. is it a
weak or strong safe haven?4 and (ii) what role do currency movements play in
either driving or disguising the safe haven property of gold?
Using daily data, we find evidence of the strong-form safe haven for seven of the
thirteen individual country stock indices tested: Canada, France, Germany, Italy,
Switzerland, the UK and the US.
The presence of a strong safe haven in these markets suggests the potential for
gold to act as a stabilizing force for financial markets by reducing losses when it is
most needed, i.e. during crisis periods.
An analysis of the role of exchange-rate effects also shows that a common currency
denomination (US dollars) of both stock indices and gold generally increases the co-
movement in all market conditions eliminating or greatly reducing the safe haven
property of gold.
1.4. Organization of paper
The paper is structured as follows. Section 2 examines the performance of gold as a
financial asset. Section 3 sets out the formal definitions of the hedge and safe
haven properties. Section 4 contains the empirical analysis, including reported
results, while Section 5 concludes.
2. The performance of gold as a financial asset
The beauty of gold is, it loves bad news.5 Gold is often referred to as a store of
value and a safe haven asset. In this section we examine some of the
characteristics of gold that might explain the perception that it is somehow different
from other assets. If gold does indeed love bad news, this would suggest prima facie
evidence that it can act as a safe haven.
2.1. The role of gold
Gold has been used as a store of value and a means of exchange for millennia. The
17th Century British Mercantilist Sir William Petty described gold, silver and jewels
as wealth ‘‘at all timesand all places”.6 Gold’s image as an immutable store of value
has become culturally embedded, reinforced by its historic links to money.
The gold standard system involved linking the value of currencies directlyto gold.
Central banks around the world continue to hold gold as one of the forms of
reserves used to defend the value of their currencies. In India, the world’s largest
consumer of gold, the precious metal holds a unique socio-cultural significance as a
symbol of a family’s wealth and status.
And yet, the perception of gold in the financial media has wavered in recent times
from ‘‘barbarous relic” to ‘‘an attractive each way bet” against risks of financial
losses or inflation (The Economist,
2005, 2009).
2.2. Characteristics of gold as a financial asset
Investors have traditionally used gold as a hedge against inflation or a falling dollar.
Because gold is priced in dollars, if the dollar loses value, the nominal (dollar) price
of gold will tend to rise, thus preserving the real value of gold. In this way, gold can
act as a hedge against exchange-rate risk for investors with dollar holdings.
Evidence of this phenomenon is presented in Capie et al. (2005).

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy