Article

Does Gold Act as a Hedge or a Global Business Review

20(1) 105–118, 2019
Safe Haven against Equity and © 2018 IMI
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DOI: 10.1177/0972150918803993
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Muhammad Aftab1
Syed Zulfiqar Ali Shah1
Izlin Ismail2

Abstract
In recent years, uncertainty in financial markets has stimulated the need to explore alternative avenues
for safeguarding wealth and managing risk. In this strand of research, gold has been particularly important
due to its potential to mitigate risk and preserve wealth. This study investigates gold behaviour against
equities and currencies in three regions across Asia. We follow Engle’s (2002) dynamic conditional
correlation-multivariate generalized autoregressive conditional heteroscedasticity (DCC-MGARCH)
model to test the gold link with equity and currency markets. We use a weekly series of exchange rate
(national currency/the US dollar), equity and gold prices in national currency over the weekly period,
1995–2013. The sample consists of 12 countries covering East Asia, South Asia and Southeast Asia.
Findings suggest that gold is just a diversifier against stocks in the Asian economies except in Korea,
Singapore and Thailand. However, gold acts as a hedge and safe haven against Asian currencies—except
China and Hong Kong—thus still preserving its monetary role.

Keywords
Gold, currency, stock, hedge, safe haven, Asia

Introduction
The recent global financial crisis (GFC) of 2007–2008 has been considered as among the worst in the
history that has caused uncertainty in the financial system by shattering investors’ faith in the financial
institutions. This poor situation has triggered the need to reinvestigate the existing risk management
models and practices. In the presence of weak systems having poor trust in investors, the real sector has

1
Department of Management Sciences, COMSATS University, Islamabad, Pakistan.
2
Department of Finance and Banking, University of Malaya, Kuala Lumpur, Malaysia.

Corresponding author:
Muhammad Aftab, Department of Management Sciences, COMSATS University, Islamabad, Pakistan.
E-mails: maftab55@gmail.com, maftab@comsats.edu.pk
106 Global Business Review 20(1)

always remained a safe alternative due to its stability and trustworthiness. In line with this, gold has been
an appropriate avenue for investment and preserving wealth, having universal acceptance and its own
intrinsic value. At the institutional level, it stabilizes the system by reducing losses during financial crisis
(Baur & McDermott, 2010) in a similar way as flight to quality1 drives a healthy and stable financial
system (Ziaei, 2012). Although there is much buzz in the press about gold, academic studies related to
gold links with other assets have been rather limited (Chan, Treepongkaruna, Brooks, & Gray, 2011;
Miyazaki & Hamori, 2013).
In recent years, gold price has also increased continuously thus making the yellow metal important
for investment and hedging objectives. Gold prices have shown tremendous growth particularly during
the GFC episode.2 On the other hand, the Asian markets are quite volatile, having downfalls during the
previous two crisis episodes, and exchange rates against the US dollar have indicated a depreciating
pattern particularly during the crisis periods. With high volatility in stock markets and fluctuations in
currency markets, the gold price growth motivates research to investigate gold behaviour by impounding
its hedging property against stocks and currencies in the Asian markets. Accompanied with recent moves
from gold consumption to investment, Asia is a very insightful region for understanding gold’s potential
benefits compared to other asset markets. Beside this, Asian countries have huge gold stocks (Ziaei,
2012). For instance, just India and Pakistan account for one-fifth of the total world gold demand (Starr
& Tran, 2008).3 In the presence of less developed hedging markets in Asia as compared to Europe and
the USA, gold is an important alternative to underdeveloped derivative markets (Hillier, Draper, & Faff,
2006). This article aims to answer an important question from an investment perspective that is does gold
act as a hedge or a safe haven against equity and currency in Asia.
This study extends the existing literature in several ways. First, we are not aware of any study that has
modelled gold with stocks and currencies in tandem in the Asian region.4 Second, this article employs
the dynamic conditional correlation (DCC) proposed by Engle (2002) which captures time-conditional
correlations exposing more insights on the gold hedging behaviour over time. Finally, as hedging issue
is more crucial during turbulent times, this study examines gold hedging behaviour not only over normal
periods but also during two major crises in the past such as the Asian financial crisis (AFC) of 1997 and
GFC of 2007–2008. Thus this article investigates the role of gold as hedge or safe haven during turbulent
times assuming that the fear of financial collapse stimulates the move to quality assets.5
The remainder of the article is organized as follows. The next section provides an overview of relevant
literature. The third section describes the research design adopted in the study. The fourth section presents
results. Finally, the fifth section concludes the article.

Research Literature
Gold resembles money,6 with one analogous property, that is, store of value. However, gold is superior
to other financial assets including currency as its value is not based on future debt and earnings with no
default risk. As quoted in The Economist (2009), ‘The beauty of gold is, it loves bad news’. In times of
turmoil and uncertainty, investors prefer avenues of certainty for their investments, and gold assures
certainty in terms of safety and security of wealth. Its price in round numbers proves it is psychologically
supportive and resilient to the uncertainty (Aggarwal & Lucy, 2007). It has been glamorous for investors
as unlike other commodities; it is durable, transportable, acceptable and easily veritable (Worthington &
Pahlavani, 2007).
Aftab et al. 107

Gold as a Hedge against Currency

Being the basis of the monetary system in the form of ‘gold standard’, gold was used as a hedge for sure
till the nineteenth century. After the debacle of Bretton Woods which fixed the exchange rate system in
the 1970s, pure fiat money-based international monetary system without any gold backing was
introduced. Since then, assessments are being made on whether it can act as internal and external hedge.
By internal hedge, we mean the movement of gold price with other commodity indices, and by external
hedge we mean the change in its price in relation to change in a currency price (i.e., exchange rate).
For instance, if a currency depreciates, prices of commodities increase in that currency (Sjaastad, 2008),
so does the price of gold. Currency fluctuations in major currencies not only affect commodity prices in
the major currency countries but also affect minor currency countries through inflationary (deflationary)
transmissions. Such fluctuations (e.g., dollar depreciation and inflation) are well hedged through
investments in gold as its price is less susceptible to exchange rate risk (Miyazaki & Hamori, 2013).
Evidence suggests that gold has consistently behaved as a hedging asset against dollar (Joy, 2011).
To test the gold hedging ability against dollar, Capie, Mills, and Wood (2005) study the exchange rate
fluctuations of Sterling pound/the US dollar and yen/the US dollar with gold. They report the hedging
ability of gold in the short run, as well as in the long run. According to Capie et al. (2005), the availability
of a range of financial products which track gold prices—although they abandon any physical property
and keep faith in the gold-against-currency uncertainty worldwide—makes them safe possibilities
against the exchange rate. Similarly, Reboredo (2013) studies whether gold acts as a hedge or a safe
haven against the US dollar using copula approach and finds gold as a hedge, as well as a safe haven
against the US dollar. In the same vein, Reboredo and Rivera-Castro (2014) examine gold’s ability to
hedge currency risk of different investment horizons taking a wide set of currencies against the US
dollar. Based on wavelet analysis, they report the usefulness of gold and the size of gold benefits at
different investment horizons. Based on the Toda-Yamamoto approach, Mishra (2014) reports mutual
predictability of gold price and stock price in India.7 Kim and Dilts (2011) extend the research to the oil
market and examine the association between the US dollar and the price of oil and gold. They establish
a negative relationship between these two commodities and the dollar, while a positive relationship
between oil and gold. Contrary to these, Wang (2013) investigates the hedging property of gold against
a collection of major currencies (Australian dollar, Canadian dollar, euro, Indian rupee, Japanese yen,
South African rand and British pound) and reports the weak hedging ability of gold against excessive
dollar devaluations. Similarly, Sari, Hammoudeh, and Soytas (2010) examine the association between
precious metals and exchange rate (the US dollar/euro) and report no long-run relationship but find a
short-run relationship, suggesting a potential for diversification in precious metals.

Gold as a Hedge against Equity

Although investment is a complex process, it is common behaviour among the investors to follow the
trends and opt for investments which offer higher returns with a modest risk. In different times, however,
particular investments become the special focus of investors—especially during a high level of uncer-
tainty. How gold links with equity investments can be elaborated by the flight to quality phenomenon—
in which investors move their funds to the safer assets (e.g., gold, bonds, etc.). Most of such episodes are
driven by the uncertain and abnormal times of economic distress (Caballero & Krishnamurthy, 2008).
During such times, the relation between risky and less risky assets starts deteriorating (Brière, Chapelle,
& Szafarz, 2012) due to investors’ lack of inclination towards risky assets (Baur & Lucey, 2009).
108 Global Business Review 20(1)

There is a substantial empirical support for this phenomenon; for instance, Bauner and Lucey (2009)
study the flight to quality from stocks to bonds in eight advanced economies (the USA, the UK, Germany,
France, Italy, Australia, Canada and Japan) and confirm the presence of flight to quality in turbulent/
crisis times. Nevertheless, the flight to quality causes a different degree of relationships among different
classes of assets, subsequently making hierarchal layering for portfolio diversification. Categorically, gold
also becomes a part of the safe asset classes depending on the risk attitude and preferences of the investor.
Besides crisis situations, by virtue of not following the traditional risk-return relationship like stocks
(Lucey & Tully, 2006), gold is considered as a substitute investment during the times of stocks volatility
(Cohen & Qadan, 2010). For example, Do, Mcaleer, and Sriboonchitta (2009) investigate the impact of
gold on stock exchange volatility in the Association of Southeast Asian Nations (ASEAN) and show that
gold is a substitute for stocks in the Philippines and Vietnam, while it is a complement to stocks in
Indonesia, Malaysia and Thailand. In another related work, Hillier et al. (2006) study the diversification
properties of precious metals (gold, silver and platinum) with a focal goal of portfolio efficiency. They
find a negative relationship between these three metals and S&P 500 index in normal high-market return
times and suggest that these metals play a hedging role in the times of stocks volatility.
Gold’s hedging ability against equities has been examined in some studies. For example, Ziaei (2012)
investigates gold price relation with equity, bond and domestic credit in ASEAN, along with Japan,
China and South Korea, and reports a negative link between gold and equity and a positive relationship
between bond and equity during crisis. His results show that gold is more suitable for hedging purposes
during crisis times. Baur and McDermott (2010) take gold in the international financial system context
and find that gold is a safe haven and a hedge for stocks in Europe and the USA while neither safe haven
nor hedge against stocks in Canada, Austria, Japan and the emerging economies such as India, China,
Brazil and Russia. Ibrahim and Baharom (2011) extend the analysis to Malaysia and suggest that gold is
somewhat a diversifier in emerging markets like Malaysia. Similar to Baur and McDermott (2010), they
corroborate gold behaviour as a safe haven against stocks; however, they conclude it as a momentary
characteristic of gold.
Although gold standard is no longer used, it has still conserved its traditional role that is a value of
store. Taking into account the importance of gold, investigations on its hedging property can support the
portfolio theory8 and give some new insights for mitigating the risk. There is a dearth of focused
investigation in terms of robust methodology and sample focusing on Asian markets. Moreover, in the
presence of different results in the extant literature, further investigations are required on gold linkages
with other assets.

Methodology
We follow Engel’s (2002) dynamic conditional correlation-multivariate generalized autoregressive
conditional heteroscedasticity (DCC-MGARCH) model to test the gold link with equity and currency
markets.9 The major advantages of this modelling are: direct exposure to the interdependence between
the study variables; an estimation of correlation through standardized residuals, thus accounting hetero-
scedasticity directly (Chiang, Jeon, & Li, 2007); an adjustment of correlation with the time-varying
volatility without a volatility bias (Celık, 2012; Cho & Parhizgari, 2008; Forbes & Rigobon, 2002);
and a supremacy to subjective structure-based methods (Moore & Wang, 2014). The estimation of
DCC-MGARCH consists of two stages—first, the estimation of univariate generalized autoregressive
conditional heteroscedasticity (GARCH) and second the estimation of time-varying conditional correla-
tions. Modelling for the multivariate DCC-MGARCH is defined as follows: Xt = nt + Ht1/2 ft where Xt is
a vector of past observations, Ht is a multivariate conditional variance, nt is a vector of conditional
Aftab et al. 109

returns and ft is a vector of standardized returns. The GARCH component of the DCC-MGARCH
framework can be comprehended easily by expressing a variance–covariance matrix as follows:
Ht = Dt Rt Dt, where Dt = diag{ h it } is a 2 × 2 diagonal matrix with time-varying standard deviations
from univariate GARCH models, and Rt = tijt for i, j = 1 and 2, which is a conditional correlation matrix.
The Dt element follows univariate GARCH (P, Q) process which is expressed as:

h it = j i + | Ppi= 1 a ip f it2 - p + | Qq =i 1 b iq h it - q 6 i = 1, 2.(1)

Second step of the framework comprises DCC (M, N) structural specifications which can be stated as
follows:

R t = Q *t - 1 Q t Q *t - 1(2)

where

Q t = (1 - | M { - | nN= 1 ~ n) Q + | M
m=1 m
{ (f t - m flt - m) + | nN= 1 ~ n Q t - n
m=1 m

where Qt = qijt is the conditional variance–covariance matrix of standardized residuals; Q is the

unconditional correlations of f t flt found by the estimating Equation (1); Q *t - 1 is a diagonal matrix
comprising square root of the diagonal elements of Qt. For this article, we are interested in Rt which is
t ijt = q ij, t / q ii, t q jj, t and expresses the conditional correlations between each country’s gold returns and
currency/equity returns.

Data
We use weekly series of exchange rate (national currency/the US dollar), equity10 and gold prices in
terms of national currency over the weekly period from 1995 to 2013. We use individual country data
rather than taking data of a group of countries. Exchange rate data are retrieved from the International
Monetary Fund financial statistics while equity and gold data are retrieved from datastream. The sample
consists of 12 countries covering Asia, for example, in East Asia (China, Hong Kong, Japan, South
Korea, Taiwan), in South Asia (India, Pakistan) and in Southeast Asia (Indonesia, Malaysia, the
Philippines, Singapore, Thailand).11 We measure returns of exchange rate, equities and gold through the
formula ln(Pt/Pt–1) and then demean each variable by subtracting from the sample mean. We follow Baur
and Lucey (2010) for definitions of hedge, safe haven and diversifier (refer to Note 5).

Analysis
Table 1 shows that variability of returns is higher in equity and gold prices relative to currency. Average
variation in equity markets (0.035) in the sample is higher than that of gold (0.025) and exchange rate
(0.009). This supports the idea that commodities’ prices are more volatile than that of exchange rates
(Joy, 2011). One other prominent reason may be that emerging economies’ stock markets are highly
volatile. It is notable that currencies are much stable in the majority of sampled Asian countries (however
exceptions include Korea and Indonesia where currency varies above 2%). This supports the view that
currency markets are much intervened by monetary authorities in the emerging economies. We also get
110 Global Business Review 20(1)

Table 1. Descriptive Statistics

GCN GHK GIN GINDO GJP GKR GMA GPA GPH

Mean 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
SD 0.024 0.024 0.024 0.035 0.025 0.034 0.025 0.024 0.024
Min. −0.125 −0.126 –0.119 –0.126 –0.136 –0.301 –0.119 –0.120 –0.111
Max. 0.139 0.139 0.150 0.397 0.135 0.432 0.139 0.142 0.137
Jarque–Bera 584.4 559 632.1 480 382.2 520 516.9 493 348.9
Prob. 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
GSI GTH GTI ECN EHK EIN EINDO EJP EKR
Mean 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
SD 0.023 0.025 0.024 0.039 0.029 0.036 0.039 0.028 0.041
Min. −0.120 −0.118 –0.129 –0.204 –0.126 –0.171 –0.211 –0.198 –0.206
Max. 0.141 0.133 0.140 0.461 0.156 0.162 0.204 0.097 0.189
Jarque–Bera 502.6 385.9 514.6 190 283.8 167.9 863.7 357.7 563.7
Prob. 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
EMA EPA EPH ESI ETH ETI CCN CHK CIN
Mean 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
SD 0.030 0.037 0.034 0.033 0.043 0.033 0.001 0.000 0.006
Min. −0.174 −0.185 –0.199 –0.250 –0.169 –0.134 –0.020 –0.002 –0.025
Max. 0.278 0.136 0.174 0.210 0.215 0.200 0.005 0.002 0.031
Jarque–Bera 7095 378.5 820 2768 462.2 285.6 690 2192 480.7
Prob. 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
CINDO CJP CKR CMA CPA CPH CSI CTH CTI
Mean 0.000 0.000 –0.037 0.000 0.000 0.000 0.000 0.000 0.000
SD 0.027 0.009 0.025 0.008 0.005 0.008 0.008 0.010 0.007
Min. −0.111 −0.051 –0.317 –0.077 –0.019 –0.034 –0.044 –0.084 –0.037
Max. 0.363 0.037 0.360 0.068 0.041 0.043 0.059 0.069 0.069
Jarque–Bera 19 302.5 36 44 15 2170 2550 29 16
Prob. 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
Source: The authors.
Note: C
 hinese renminbi gold price (GCN), Hong Kong dollar gold price (GHK), Indian rupee gold price (GIN), Indonesian
rupiah gold price (GINDO), Japanese yen gold price, (GJP), Korean won gold price (GKR), Malaysian ringgit gold price
(GMA), Pakistani rupee gold price (GPA), the Philippines peso gold price (GPH), Singaporean dollar gold price (GSI), Thai
baht gold price (GTH), Taiwan dollar gold price (GTI), Chinese renminbi (CCN), Hong Kong dollar (CHK), Indian rupee
(CIN), Indonesia rupiah (CINDO), Japanese yen (CJP), Korean won (CKR), Malaysian ringgit (CMA), Pakistani rupee
(CPA), the Philippines peso (CPH), Singaporean dollar (CSI), Thailand baht (CTH), Taiwan dollar (CTI), Chinese Shanghai
Stock Exchange Composite (ECN), Hong Kong Hang Seng (EHK), Indian Bombay Stock Exchange (BSE) Sensex (EIN),
Indonesia Jakarta Stock Exchange (EINDO), Japanese Nikkei (EJP), Korea Composite Stock Price Index (EKR), Malaysian
Kuala Lumpur Composite Index (EMA), Pakistani Karachi Stock Exchange (EPA), the Philippines Stock Index (EPH),
Singaporean Straits Times Index (ESI), Thailand Stock Exchange (ETH) and Taiwan Weighted Index (ETI).

support for the portfolio-based approach for diversification as stock returns are higher than that of gold
in the sample. Jarque–Bera test shows that all series violate normality.
Serial correlation is an important issue in financial time series. Table 2 reports the portmanteau (Q)
test for serial correlation up to the 20th order. Q test of serial correlation shows that null hypothesis of no
serial correlation is not supported in all cases, gold, equities and currency, as all estimated values are
Aftab et al. 111

Table 2. Portmanteau (Q) Test for Serial Correlation

GCN GHK GIN GINDO GJP GKR

Q TEST 43.763 48.568 64.969 441.701 53.46 91.544
Prob. 0.001 0.000 0.000 0.000 0.000 0.000
GMA GPA GPH GSI GTH GTI
Q TEST 63.421 61.013 59.354 49.823 67.48 49.883
Prob. 0.000 0.000 0.000 0.000 0.000 0.000
ECN EHK EIN EINDO EJP EKR
Q TEST 54.864 89.120 41.096 48.341 55.264 96.592
Prob. 0.000 0.000 0.003 0.000 0.054 0.019
EMA EPA EPH ESI ETH ETI
Q TEST 66.599 58.025 33.314 70.826 50.51 63.207
Prob. 0.000 0.000 0.031 0.001 0.000 0.011
CCN CHK CIN CINDO CJP CKR
Q TEST 221.486 1583.278 1611.883 1465.410 1484.114 200.344
Prob. 0.000 0.000 0.000 0.000 0.000 0.000
CMA CPA CPH CSI CTH CTI
Q TEST 1485.251 1471.213 1499.429 33.547 1631.28 65.413
Prob. 0.000 0.000 0.000 0.029 0.000 0.000
Source: The authors.
Note: Refer to Table 1 for abbreviations.

above the asymptotic chi-square distribution critical value (31.401) for 95 per cent fractile of 20th order
of correlation. These results dictate us to use GARCH (P, Q) models which incorporate volatility in data
series. Through Akaike information criterion, we find GARCH (1, 1) as the most suitable model. GARCH
(1, 1) results are reported in Table 3. As study data are not normal, we estimate DCC-GARCH model based
on quasi-maximum likelihood method. This method generates standard errors tolerating non-normality
by maximizing the likelihood assuming that residuals are conditionally normal while in real sense they
are drawn from different conditional distributions. Through log likelihood value comparison, we come to
the point with alternative lags that data behaviour is suitably fitted in DCC (1, 1) with each conditional
variance in GARCH (1, 1) for all series under consideration. Table 3 shows that all GARCH processes
are highly persistent as the sum of a1 and b1 is near to 1 for all cases. DCC parameters show consistency
of correlation, but the constancy of parameters is rejected as chi-square statistic is statistically significant
in all cases, so the null hypothesis of constant correlations is not accepted.
Moving to conditional correlations analysis, Figure 1 reports the DCCs between gold and the 12
Asian countries’ equity markets. Over the sample period, the association between gold and equity is time
varying dominantly positive with alternative negative trends. The DCC magnifies that negative associa-
tion is more pronounced in case of Korea, Singapore and Thailand. It is interesting to note that gold
association with stocks become more negative during periods of Asian crisis (July1997–June 1998) and
subprime crisis (September 2007–March 2009) in these countries. However gold acts as a hedge and safe
heaven only in Thailand (refer to Note 5 for definitions). With short-run fluctuations and without a
long-run pattern in these graphs, we note that gold behaves as a diversifier in a majority of the Asian
112 Global Business Review 20(1)

Table 3. DCC-GARCH Model Estimations

GCN ECN CCN GHK EHK CHK GIN EIN CIN

j 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
(0.025) (0.000) (0.000) (0.047) (0.040) (0.074) (0.003) (0.022) (0.000)
ai1 0.172 0.245 0.360 0.149 0.103 0.041 0.198 0.113 0.110
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
bi1 0.827 0.742 0.614 0.852 0.884 0.812 0.779 0.868 0.812
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
{1 0.044 0.091 0.090
(0.026) (0.000) (0.000)
~1 0.706 0.808 0.821
(0.000) (0.619) (0.619)
|2 test 417.124 15.46 18.46
(0.000) (0.000) (0.000)
GINDO EINDO CINDO GJP EJP CJP GKR EKR CKR
j 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
(0.006) (0.003) (0.000) (0.014) (0.000) (0.000) (0.002) (0.004) (0.005)
ai2 0.272 0.173 0.122 0.172 0.222 0.849 0.251 0.151 0.201
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
bi2 0.715 0.775 0.761 0.796 0.671 0.115 0.723 0.832 0.653
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
{2 0.014 0.025 0.031
(0.004) (0.002) (0.000)
~2 0.955 0.916 0.928
(0.000) (0.000) (0.000)
|2 test 11445.38 2143.91 5335.29
(0.000) (0.000) (0.000)
GMA EMA CMA GPA EPA CPA GPH EPH CPH
j 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
(0.021) (0.023) (0.082) (0.042) (0.032) (0.000) (0.052) (0.009) (0.002)
ai1 0.181 0.078 0.088 0.151 0.098 0.081 0.165 0.079 0.078
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
bi1 0.820 0.916 0.770 0.836 0.885 0.671 0.836 0.884 0.710
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
{1 0.012 0.058 0.044
(0.038) (0.002) (0.001)
~1 0.959 0.462 0.877
(0.000) (0.048) (0.000)
|2 test 7574.22 25.999 1281.96
(0.000) (0.000) (0.000)
GSI ESI CSI GTH ETH CTH GTI ETI CTI
j 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
(0.015) (0.031) (0.019) (0.050) (0.777) (0.000) (0.021) (0.023) (0.007)
ai1 0.157 0.102 0.109 0.178 0.183 0.163 0.151 0.104 0.054
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.001)
bi1 0.828 0.896 0.879 0.828 0.774 0.774 0.834 0.885 0.842
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
(continued)
Aftab et al. 113

Table 3. (continued)
GSI ESI CSI GTH ETH CTH GTI ETI CTI
{1 0.019 0.018 0.056
(0.000) (0.063) (0.000)
~1 0.954 0.464 0.827
(0.000) (0.012) (0.000)
|2 test 14143.39 17.46 881.39
(0.000) (0.001) (0.000)
Source: The authors.
Note: These parameter estimates are based on the DCC-GARCH model: h it = j i + a i1 f 2it - 1 + b i1 h it - 1 and Q t = (1 - { 1 - ~ 1)
Q + { 1 (f t - m flt - m) + ~ 1 Q t - n . Probability values are reported in parentheses. Please refer to Table 1 for abbreviations.

Figure 1. DCCs between Gold and Equity

Source: The authors.
Note: Each graph shows DCC between gold and respective stock exchange index i.e. Chinese SSE Composite (ECN), Hong
Kong HANG SENG (EHK), Indian BSE SENSEX (EIN), Indonesia JKSE (EINDO), Japanese NIKKEI (EJP), Korean KOSPI
(EKR), Malaysian KLCI (EMA), Pakistani KSE (EPA), Philippines PSI (EPH), Singaporean STI (ESI), Thailand SET (ETH),
Taiwan TWII (ETI). To smooth recurring variations, we report median spline graph. The dotted horizontal line indicates
zero position on the y-axis.
114 Global Business Review 20(1)

Figure 2. DCCs between Gold and Exchange Rate

Source: The authors.
Note: D
 CC is between gold and respective currency exchange rate with US dollar i.e. Chinese renminbi (CCN), Hong Kong
dollar (CHK), Indian rupee (CIN), Indonesia rupiah(CINDO), Japanese yen (CJP), Korean won (CKR), Malaysian ringgit
(CMA), Pakistani rupee (CPA), Philippines peso (CPH), Singaporean dollar (CSI), Thailand baht (CTH), Taiwan dollar
(CTI). To smooth recurring variations, we report median spline graph. The dotted horizontal line indicates zero position
on y-axis.

equity markets. Higher volatility in emerging markets may be one good reason of this behaviour.
The DCC between gold and exchange rates of the 12 Asian countries is reported in Figure 2. Here it is
pertinent to clarify that by ‘gold as hedge against currency’, we mean that when currency depreciates,
gold prices rise to compensate for inflationary forces owing to monetary component. As we take exchange
rates in a direct quotation (i.e., national currency/the US dollar), results are interpreted with opposite
directions. The correlation between gold and currency is negative which shows the hedging role of gold
against currency in all considered countries, except China and Hong Kong. We also observe from the
Aftab et al. 115

Table 4. Dynamic Conditional Correlations Parameters

Country r1 r2 r1 AC r2 AC r1FC r2FC

China 0.082 −0.044 0.108 −0.245 0.096 −0.307
(0.068) (0.085) (0.117) (0.051) (0.176) (0.000)
Hong Kong 0.120 −0.018 0.299 −0.041 0.038 0.011
(0.111) (0.091) (0.210) (0.083) (0.143) (0.174)
India 0.032 0.145 −0.210 0.069 0.047 −0.026
(0.091) (0.087) (0.018) (0.252) (0.135) (0.092)
Indonesia 0.013 0.293 0.058 0.167 −0.703 0.721
(0.180) (0.081) (0.241) (0.085) (0.004) (0.167)
Japan 0.075 0.214 0.312 0.080 −0.037 0.197
(0.105) (0.200) (0.098) (0.183) (0.095) (0.081)
Korea −0.023 0.133 0.161 0.121 −0.286 0.507
(0.077) (0.071) (0.125) (0.076) (0.091) (0.091)
Malaysia 0.069 0.086 −0.114 0.127 0.121 −0.029
(0.168) (0.094) (0.043) (0.071) (0.143) (0.093)
Pakistan 0.0174 0.144 0.074 0.185 0.025 0.052
(0.125) (0.067) (0.179) (0.073) (0.151) (0.131)
The Philippines 0.069 0.190 0.138 0.190 −0.102 0.012
(0.153) (0.061) (0.096) (0.152) (0.131) (0.153)
Singapore −0.004 0.079 −0.160 0.197 −0.032 −0.025
(0.036) (0.168) (0.048) (0.092) (0.113) (0.061)
Thailand −0.066 0.127 −0.561 0.124 0.047 −0.017
(0.050) (0.071) (0.099) (0.017) (0.142) (0.031)
Taiwan 0.008 0.129 −0.015 0.117 −0.037 0.146
(0.154) (0.063) (0.088) (0.089) (0.041) (0.098)
Source: The authors.
Note: r1 and r2 are conditional correlations between gold and equity return and between gold return and currency return,
respectively. AC refers to Asian financial crisis (1997–1998) and FC refers to subprime financial crisis (2007–2008).
Numbers in parentheses show p-values.

graphs that gold has acted as a safe haven against Asian currencies during the Asian crisis and Subprime
crisis, except in China and Hong Kong. A highly managed exchange rate regime and more frequent
interventions of the central bank may be one of the reasons for the deteriorating hedging role of gold in
China and Hong Kong. Table 4 shows the parameters of DCC, which also supports the findings observed
in Figures 1 and 2.

Conclusion and Implications

The GFC has affected financial markets severely, shaking the investor’s confidence in financial
institutions thus instigating the need for exploring alternative safe investment avenues. Assuming that
gold can pave ways for a more stable and trustworthy financial system, this study investigates the
hedging role of gold against the currency and stock markets in the 12 important Asian economies over
the weekly period from 1995 to 2013. Following the DCC-GARCH framework, the results show that
there is substantial evidence that gold plays a diversifier role rather than a hedging role in majority of the
sample Asian stock markets. This may be due to high volatility in Asian stock markets12 which has
116 Global Business Review 20(1)

deteriorated gold’s role to a mere diversifier rather as a hedge. On the other hand, in currency markets,
gold acts as a hedge against currency (exchange rate) in majority of the Asian markets. Based on AFC
and GFC episodes, gold is found as a safe haven against currency only in the majority of sample markets.
We expect that the findings of this study can be useful to policymakers and investors in understanding
gold hedging perspective in Asian stock and currency markets. Due to the export-based nature of
emerging Asian economies, exchange rate is very important in their trade policy. However, Asian
economies, high on gold demand, may suffer higher gold price behaviour in response to particular trade-
promoting exchange rate interventions. This implication is not applicable for China and Hong Kong
where the behaviour of gold against currency is somewhat a diversifier. In fact, China and Hong Kong
follow a highly managed exchange rate regime which lets prices of commodities including gold fluctuate
marginally. This study implies that investors may make better asset allocations in their portfolios by
keeping low or negatively correlated assets to earn better return premiums. As we report a good deal of
gold as a diversifier against stocks, investors may introduce gold in their portfolios to diversify their
portfolios’ risk to a greater extent for value protection.

Acknowledgement
The authors are grateful to the anonymous referees of the journal for their extremely useful suggestions to improve
the quality of the article. Usual disclaimers apply.

Declaration of Conflicting Interests

The author declared no potential conflicts of interest with respect to the research, authorship and/or publication of
this article.

Funding
The author received no financial support for the research, authorship and/or publication of this article.

Notes
1. Flight to quality occurs when investors direct their capital to less risky assets.
2. In real terms, gold price (bullion US dollar/troy ounce) increased 28.19 per cent during the period from
September 2007 to March 2009.
3. India and Pakistan’s gold demand constituted 26.02 per cent of total world gold demand in 2015 (WGC, 2016).
4. For instance, Capie et al. (2005) study gold as a hedge against Sterling dollar and yen dollar; Joy (2011)
investigates gold as a hedge or safe haven against the US dollar in eight exchange rate pairs. Baur and Lucey
(2010) look into gold with stocks and bonds in the USA, the UK and Germany. Baur and McDermott (2010)
inquire gold with stocks in 13 countries (including four Asian countries) and Miyazaki and Hamori (2013)
studied gold and stocks dynamics in the USA.
5. According to Baur and Lucey (2010), an asset acts as a hedge when on average it is uncorrelated or negatively
correlated with another asset or portfolio. An asset is termed ‘safe haven’ if it is uncorrelated or negatively
correlated in times of crisis and asserted as a diversifier if it is correlated positively (not perfectly) with another
asset or portfolio.
6. Three main properties of money are as follows: unit of account, store of value and unit of exchange.
7. In another research based on the Indian sample, Shiva and Sethi (2015) find unidirectional causality from gold
to both equity and currency markets.
8. This theory states that risk-averse investors can form portfolios to increase their expected returns for a given
level of risk (Markowitz, 1952).
9. Kroner and Claessens (1991) and Ding and Engle (2001) discuss these models. Engle and Sheppard (2001)
suggest the appropriateness of DCCs models. Li (2011) and Zainudin and M’ng (2014) suggest the effectiveness
of correlation parameters in capturing the assets’ co-movement in different financial settings.
Aftab et al. 117

10. For equity standard, national stock market indices of sample countries are used (i.e., Chinese SSE Composite,
Hong Kong HANG SENG, Indian BSE Sensex, Indonesia JKSE, Japanese Nikkei, Korean KOSPI, Malaysian
KLCI, Pakistani KSE, the Philippines PSI, Singaporean STI, Thailand SET and Taiwan TWII).
11. None of these countries follow a fixed exchange rate. Each of them follows a float regime with some managed
exchange rate inclinations. Rajan (2012) provides details on the exchange rate regimes in Asia. Moreover, all
these countries are moving to the free market-based system as they have to fulfill WTO guidelines.
12. This volatility emerges through the high returns premiums in the emerging stock markets that are around two
times higher than that of advanced markets (Madhur, 2008). This attracts the advanced countries’ risky capital
in the form of high portfolio flows. These portfolio flows are also high due to monetary easing in the advanced
markets after the GFC (Bussiere & Phylaktis, 2016).

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