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Empirical Economics

Erschienen in:

21.12.2017

Tail dependence between gold and sectorial stocks in China: perspectives for portfolio diversification

verfasst von: Joscha Beckmann, Theo Berger, Robert Czudaj, Thi-Hong-Van Hoang

Erschienen in: Empirical Economics | Ausgabe 3/2019

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Abstract

This article analyzes the relationship between gold quoted on the Shanghai Gold Exchange and Chinese sectorial stocks from 2009 to 2015. Using different copulas, our results show that there is weak but significant tail dependence between gold and Chinese sectorial stock returns. This means that the dependence between extreme movements of the two assets is not pronounced and confirms the role of gold as a safe haven asset. Based on analyzing the efficient frontier, CCC-GARCH optimal weights, hedge ratios and hedging effectiveness, we further show that adding gold into Chinese stock portfolios can help to reduce their risk. Gold appears to be the most efficient diversifier for stocks of the materials sector and the less efficient for the utilities sector. As a robustness check, we also compare gold to oil and indicate that gold is more efficient than oil in the diversification of Chinese stock portfolios.

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According to the World Gold Council, the total global demand for gold in 2014 was 3924 tons, with India’s consumer demand accounting for 843 tons and China’s for 814 tons. See World Gold Council, “Gold Demand Trends,” http://www.gold.org/supply-and-demand/gold-demand-trends/back-issues/gold-demand-trends-full-year-2014.

China also joined the World Gold Council as a full member on September 22, 2015.

Following the GFMS 2014 survey, the SGE was behind London, New York and Tokyo with transaction volumes of 570,000 tons, 147,093 tons, and 12,225 tons, respectively.

The announcement took place at the LBMA Bullion Market Forum 2014 in Singapore. For more information see http://www.en.sge.com.cn/about-us/sge-overview/sgei-intro/.

O’Connor et al. (2015) present a detailed survey of this literature strand and show that the number of papers published on gold has increased significantly in the last years and peaked in 2010 with almost 30 published papers.

We notice that this pattern might change in the future due to the implications of the SGE opening to international members.

Following Mr. Luode, the current Chairman of the SGE, the objective of gold pricing in Renminbi (RMB) is to internationalize the Chinese currency. See Bénassy-Quéré and Forouheshfar (2015) for more information on the internationalization of the RMB.

Following information given by bullionstar, the transaction volume of iAu99.99, that is the most traded on the International Board, increased strongly between 2014 and 2015 and reached its maximum on April 8, 2015, with 31 tons per day. See: https://www.bullionstar.com/blogs/koos-jansen/shanghai-international-gold-exchange-comes-to-life/.

Indeed, for high values of degrees of freedom, the t copula converges to the Gaussian copula. Please refer to Sect. 3 for details.

We refer to the portfolio composed of all stock sectors, as shown in the efficient frontiers in Fig. 2.

The absence of a local oil market in China, contrary to the gold market, can be explained by the fact that China is the world largest net oil importer following the US Energy Information Administration (2014). See: http://www.eia.gov/todayinenergy/detail.cfm?id=15531.

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Titel: Tail dependence between gold and sectorial stocks in China: perspectives for portfolio diversification
verfasst von: Joscha Beckmann
Theo Berger
Robert Czudaj
Thi-Hong-Van Hoang
Publikationsdatum: 21.12.2017
Verlag: Springer Berlin Heidelberg
Erschienen in: Empirical Economics / Ausgabe 3/2019
Print ISSN: 0377-7332
Elektronische ISSN: 1435-8921
DOI: https://doi.org/10.1007/s00181-017-1381-8

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