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Dynamic Linkages between Gold and Equity Prices: Evidence from Indian Financial Services and Information Technology Companies

Posted: 22 Mar 2017  

Shubhasis Dey

Indian Institute of Management, Kozhikode, India

Aravind Sampath

Indian Institute of Management (IIM), Kozhikode

Date Written: February 27, 2017

Abstract

In this paper, we use multivariate GARCH models to analyze dynamic linkages between gold and equity price returns. We model dynamic conditional correlations and volatility spillovers between these assets. Our results indicate that spot gold can be an effective hedge against stock prices. A $1 long position in the NIFTY Financial Services index can be hedged for 12 cents with a short position in spot gold and a $1 long position in the NIFTY Information Technology index can be hedged for 5 cents with a short position in spot gold. Gold also seems to act as a safe haven asset during the Global Financial Crisis period between 2007 and 2009. Our results suggest that crisis or not a prudent investor should allocate around 30 per cent of her investible assets in gold within a gold/stock portfolio. Given that in India around 41% of the population is still without access to banking services and are hence deprived of interest-earning deposits, it is not very surprising to find gold’s optimal portfolio weight to be as high as 30 per cent.

Keywords: Spot gold, stock, MGARCH, correlation, volatility spillovers

JEL Classification: G11, G12, C32, C52

Suggested Citation

Dey, Shubhasis and Sampath, Aravind, Dynamic Linkages between Gold and Equity Prices: Evidence from Indian Financial Services and Information Technology Companies (February 27, 2017). 30th Australasian Finance and Banking Conference 2017. Available at SSRN: https://ssrn.com/abstract=2938228

Shubhasis Dey (Contact Author)

Indian Institute of Management, Kozhikode, India ( email )

Kerala
Kozhikode, Kerala 673570
India

Aravind Sampath

Indian Institute of Management (IIM), Kozhikode ( email )

Kerala
Kunnamangalam
Kozhikode, KS Kerala 673570
India

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