Gold and the S&P500: An analysis of the return and volatility relationship

Abstract

The relationship between gold and the stock market has attracted considerable attention in both the academic literature and financial media since gold is perceived a safe haven for equity. This describes the empirical phenomenon that gold holds its value or exhibits positive returns in a situation of extreme stock price declines. Whilst studies investigating the role of gold as safe haven typically focus on returns, we also investigate the relationship between gold volatility and stock returns. In particular, we are interested in the behaviour of gold volatility on days with negative shocks in the equity market. The conditional volatility of gold is of direct relevance for an assessment of the effectiveness of the safe haven property from a portfolio perspective. We find that gold does not move in tandem with stocks but has a significantly higher volatility in response to negative shocks in the equity market. In essence, our findings are in line the notion of gold as a (weak) safe haven. However, they also imply that the higher gold volatility in response to a negative stock market shock contributes to the risk of a portfolio composed of the two assets.

Keywords: gold, equity, safe haven, futures, state-dependence, uncertainty

JEL Classification: C32, G10, G11, G14, G15, L70