Hedging with financial innovations in the Asia-Pacific markets during the COVID-19 pandemic: the role of precious metals

Abstract

In this study, we exploit the information contained in financial innovations in precious metals for hedging the risks associated with the Asia-Pacific equities during the current pandemic. We measure financial innovations as exchange traded funds (ETFs) for gold, silver, platinum and palladium which contrast with investment in the physical precious metals since the former tracks well the prices of the latter and as well provides cost-effective alternative to invest in the markets without storage costs. Based on the optimal portfolio weights and optimal hedge ratios, we find that gold offers the best hedge (followed by silver, platinum, and palladium) against the risk associated with the Asia-Pacific equities during the COVID-19 pandemic albeit with a lower hedging effectiveness during the pandemic. Overall, including gold ETFs in an Asia-Pacific equity portfolio would provide both a valuable portfolio combination that could improve the risk-adjusted performance of the market in addition to serving as an effective hedge for equity-related risks.