Do Gold and Crude Oil Act as Portfolio Diversifiers, Safe Haven Assets or Hedge Instruments Against Volatility in Stock Markets and Exchange Rates? Evidence from sub-Saharan Africa
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Date
2022-01-12
Authors
Wafula, Martin
Alagidede, Imhotep
Simpasa, Anthony
Nandelenga
Journal Title
Journal ISSN
Volume Title
Publisher
African Economic Research Consortium
Abstract
This paper examines whether gold and crude oil are used as diversifying, hedging or as
safe haven assets against stock markets and exchange rate volatility in selected
African countries. We use daily data for South Africa, Kenya and Nigeria from
2005 to 2021 and apply different techniques, including the Dynamic Conditional
Correlation and the Spillover Index to decipher the financial market
characteristics of the two commodities during periods of market stress. The
findings show that: (i) countries use gold and oil as diversifiers and safe haven
assets rather than as a hedge instrument; (ii) the Nairobi Stock Exchange and
Johannesburg Stock Exchange are the largest volatility contributors to other
markets; (iii) while Nairobi stock exchange and gold are net transmitters of risk,
and; (iv) currency markets are net receivers of risk transfer. We find heterogeneous
results during periods of crisis. Specifically, during the period of COVID-19
pandemic, gold’s attributes of portfolio diversifier and safe haven instrument
increase, and acting as a hedge asset. Similarly, the Nigeria currency market and
Johannesburg Stock Market are the largest net volatility transmitters while the
Kenyan currency market and Nairobi Stock Exchange are net receivers of volatility.
Our results highlight the significance of the characteristics of the two commodity
assets for investors and financial markets.
Description
Keywords
Commodity prices , Exchange rate , Stock market , DCC-GARCH