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https://ssrn.com/abstract=2004796
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File name: SSRN-id2263903. ; Size: 1146K
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Financial Turmoil and Safe Haven Assets
Dirk G. Baur
University of Western Australia - Business School; Financial Research Network (FIRN)
Thomas K. J. McDermott
University College Cork; London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment
May 13, 2013
Abstract:
Financial crises and contagion have highlighted the need for safe haven assets. However, their existence, role and interactions are not well understood. We analyze the two most prominent yet fundamentally different safe haven assets, US government bonds and gold. Our econometric analysis explicitly models the dynamic interaction between these assets and the global stock market. While both assets appear to act as safe havens, we find that gold, in contrast to US government bonds, becomes increasingly sensitive to large negative shocks in the stock market. Gold therefore appears to be a stronger safe haven in extreme conditions despite the fact that it is more risky and less liquid than bonds. We offer a behavioral interpretation to explain our findings.
Number of Pages in PDF File: 34
Keywords: safe haven, safe assets, uncertainty, gold, US government bonds, Ellsberg decision rule, ambiguity-aversion, black swan event, contagion
JEL Classification: D03, D81, G01, G11
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Date posted: February 14, 2012
; Last revised: May 12, 2013
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