How does economic policy uncertainty drive gold–stock correlations? Evidence from the UK

ABSTRACT

In this article, we investigate the effects of economic policy uncertainty (EPU) on correlations between the UK stock market and gold market. We find that less certain economic policies result in lower correlations, while more certain economic policies result in higher correlations. The correlations are symmetric and show no structural breaks caused by the recent financial crisis. The recent financial crisis has not changed EPU effects on the correlations. The effects of one positive one-standard-deviation shock of the logarithmic change rate of the EPU on the correlations last approximately 19 months.

KEYWORDS:

• Economic policy uncertainty
• gold–stock correlations
• flight to quality
• financial crisis

JEL CLASSIFICATION:

• C32
• G18

Acknowledgements

We also appreciate the assistance of Xiao-Ming Li.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ ‘Flight to quality’ is early defined in lending by Bernanke, Gertler, and Gilchrist (1994). Later it is employed in financial market. Details of ‘flight to quality’ can be seen in relevant papers. We thank the anonymous referee’s helpful advice.

² The website is ‘http://www.policyuncertainty.com’. Gold spot price and FTSE 100 index data were drawn from the wind database.

³ We appreciate the anonymous referee’s insightful suggestion.

Additional information

Funding

This work was supported by the China National Science Fund [grant numbers 71171108, 71371096].