Hedging With Gold, Correlation Cycles and Risk Aversion: Evidence From Global Economic Sectors

Abstract

We investigate (i) the variation of gold's hedging, safe haven and diversification properties across dynamic correlation cycles and 11 global sector equities, and (ii) the joint impact of risk aversion and global crisis events on asymmetric dynamic conditional correlation (ADCC) between gold and each sector. Contrary to evidence based on linear models, we find that (i) gold is consistently a strong hedge in the low ADCC cycle and largely an effective diversifier at moderate ADCC cycles. (ii) Gold is predominantly a strong safe haven during low and moderate ADCC quantiles. (iii) Risk aversion is inversely related to sector-gold ADCC, especially in the lower ADCC quantiles. Moreover, crisis events such as COVID-19, the global financial crisis (GFC) and the European sovereign debt crisis (ESDC) amplify the impact of risk aversion on ADCC. (iv) Investors derive a marginal utility loss for hedging defensive sectors such as healthcare, consumer staples and utilities, requiring relatively lower gold allocation than cyclical sectors. Our results have important implications for dynamic portfolio allocation and risk management decisions.