Frequency interdependence and portfolio management between gold, oil and sustainability stock markets

Abstract

This paper examines the dynamic correlation relationship between Dow Jones sustainability indices (DJSI) and oil and gold in the time and frequency domain. Our empirical analysis discloses multiple imperative findings. First, the period of high dependence between oil and these DJSI assets applies only at higher frequency (128–256 days). As such, DJSI Europe, US, Asia-Pacific, and Korea show the strongest dependence with oil in the long run. However, this inter-relationship is only visible from 2018 onwards. Second, the link between DJSI indices and gold is minimal across the dependency spectrum and at multiple frequencies. Third, when comparing a benchmark portfolio with a blended portfolio composed of a suitability index with gold/oil, in consistency with the hedging ratios results, the utility gain is remarkably better in the sustainability/gold pairing. These findings indicate that the safe haven status of gold for investors in conventional stocks can be extended to investors in sustainability stocks.