Is Gold Always a Safe-Haven? Evidence from a Novel Markov-Switching Multivariate GARCH Model with Copula-Distributed Innovations

59 Pages Posted: 18 Nov 2021 Last revised: 29 Aug 2022

See all articles by Markus J. Fülle

Markus J. Fülle

University of Goettingen (Göttingen)

Helmut Herwartz

University of Goettingen (Göttingen)

Date Written: August 12, 2022

Abstract

We suggest a new Markov switching approach to multivariate volatility modeling for improving the dynamic assessment of financial market interdependencies. The approach takes advantage of the flexible copula multivariate GARCH (C-MGARCH) model of Lee and Long (2009), and allows state-specific higher-order dependence structures. We show some asymptotic features of the new model and motivate a two-step maximum likelihood estimator. As an empirical illustration, we consider a bivariate series of returns of a high-yield equity index (MSCI World Developed Markets) and a traditional safe-haven asset (gold), and investigate how higher-order dependencies in copula-distributed model innovations show up in observable return processes. The Markov switching generalization of the C-MGARCH model captures structural changes of heterogeneous non-linear dependence patterns among financial returns (conditional independence, flight-to-safety, crash, risk-seeking, boom), and helps to uncover flight-to-safety (i.e. safe-haven) effects. However, as a further result, we find that gold is not generally a safe-haven under changing financial market conditions. Out-of-sample density evaluations underline the merits of the suggested Markov switching model in comparison with time-invariant benchmarks (MGARCH, C-MGARCH).

Keywords: Copula, multivariate GARCH models, Markov switching, safe-haven, gold, stock market

JEL Classification: C14, C32, C51, C58, G11

Suggested Citation

Fülle, Markus J. and Herwartz, Helmut, Is Gold Always a Safe-Haven? Evidence from a Novel Markov-Switching Multivariate GARCH Model with Copula-Distributed Innovations (August 12, 2022). Available at SSRN: https://ssrn.com/abstract=3947734 or http://dx.doi.org/10.2139/ssrn.3947734

Markus J. Fülle (Contact Author)

University of Goettingen (Göttingen) ( email )

Platz der Gottinger Sieben 3
Gottingen, D-37073
Germany

Helmut Herwartz

University of Goettingen (Göttingen) ( email )

Platz der Gottinger Sieben 3
Gottingen, D-37073
Germany

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