Relationship between Gold and Stock Returns: Empirical evidence from BRICs

by Umesh Kumar Jaiswal

Institution: Umeå University
Year: 2012
Keywords: Gold; Stock; BRICs; Economic sector; correlation; spillover effect; VAR; BEKK GARCH; Social Sciences; Economics and Business; Business Administration; Samhällsvetenskap; Ekonomi och näringsliv; Företagsekonomi; samhälle/juridik; Social and Behavioural Science, Law
Record ID: 1344292
Full text PDF: http://urn.kb.se/resolve?urn=urn:nbn:se:umu:diva-53355


The purpose of this study was to investigate the relationship between gold and stock returns with evidence from BRIC countries during 2001-2010. The importance of this topic is caused by instability in the world economy and stock markets, and due to this instability, there is a growing interest in gold from investors and the current bull market of gold. Considering that gold is independent from most of the macroeconomic factors we believe that it therefore should be independent from or low correlated with stock, which makes this metal useful for portfolio diversification. Based on previous studies, we also believe that gold can be used to predict, to some degree, the stock market trend. The force behind such stable price growth of gold is sustained by demand from emerging countries such as BRICs. Moreover, there is lack of research on this topic from the perspective of different economic sectors. These facts determined the choice of countries along with their economic sectors. The research was designed in the frame of quantitative method. The types of relationship that were investigated are correlation and spillover effects. In order to examine these relationships we have utilized secondary data, which are gold prices and stock indices turned into returns. The Pearson’s correlation and diagonal BEKK GARCH were applied to test the correlation and spillover effects between returns of gold and stock, respectively. The results of the study showed that gold and stock returns are correlated, however to a low degree. Additionally, correlation varies across countries and their economic sectors over time, which may influence investors’ decision in choice of allocation of investments. The other findings showed the existence of mean spillover effects, both unidirectional and bidirectional, and volatility spillover effects between gold and stock returns. The principal conclusions were that gold is an efficient portfolio diversifier, which also plays a role of a hedge and a safe haven. Similarly, taking into account an existence of spillover effects, gold can be helpful in terms of stock prediction and vice versa. Further, another important finding was that not all of the economic sectors had mean spillover with gold, but in terms of volatility, every sector had a certain relationship with gold.