Testing for causality between the gold return and stock market performance: evidence for ‘gold investment in case of emergency’

Abstract

This article investigates the causal relationships between gold and stock market performance or uncertainty by employing nonuniform weighting cross-correlations. In our sample period covering the last decade, we detect a unidirectional causality in mean from stock to gold, but find no causality in variance between the two. For subsample periods divided into pre- and post-current financial crisis, although we detect bidirectional causality in mean for the first sample period, there exists only a unilateral causality in mean and variance from stock to gold for the second sample period. These findings imply that flight-to-quality has occurred during the recent financial turmoil.

Keywords:

• gold return
• stock market
• causality in mean
• causality in variance
• nonuniform weighting cross-correlations
• flight-to-quality
• hedge
• safe haven

JEL Classification::

• G11
• G15

Notes

¹ Also refer to Joy (2011) and Pukthuanthong and Roll (2011) for the latest research on the relationship between gold and exchange rates. For the relationship between gold and inflation, refer to, for example, Mahdavi and Zhou (1997) and Worthington and Pahlavani (2007).

² Ciner et al. (2010) further extend the analysis of Baur and Lucey (2010) and Baur and McDermott (2010) by treating more asset classes (i.e. equities, bonds, dollar, oil and gold) as subjects of assessment. Chan et al. (2011) is the latest extensive research examining linkages between the stock market and other asset markets, covering the gold, oil, and housing markets by employing a Markov switching model.

³ For details concerning the Spillover Index and its application to stock markets, see also Diebold and Yilmaz (2010) and Yilmaz (2010).

⁴ For the application of the CCF approach, refer to, for example, Bhar and Hamori (2005, 2008), Inagaki (2007), Hoshikawa (2008) and Tamakoshi (2011). Caporale et al. (2002) adopt a Vector Autoregressive (VAR) multivariate GARCH framework and causality test for relevant zero restrictions on the conditional variance parameter. Furthermore, this test can test for s structural break in the volatility.

⁵ The determination process of gold fixing is described briefly by Capie et al. (2005) and Lucey and Tully (2006).

⁶ Refer to http://www.lbma.org.uk/pages/index.cfm.

⁷ Refer to http://www.stlouisfed.org/.

⁸ The details of the unit root test are available upon request.

⁹ For the ARCH model and its extension including the EGARCH model, refer to Bollerslev et al. (1992, 1994), Hamilton (1994) and Enders (2010). For the details of the EGARCH model, refer to Nelson (1991).

¹⁰ The details of the empirical results are available upon request.