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Journal of Indian Institute of Management Bangalore

IIM Bangalore offers Degree-Granting Programmes, a Diploma Programme, Certificate Programmes and Executive Education Programmes and specialised courses in areas such as entrepreneurship and public policy.

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The Indian Institute of Management Bangalore (IIMB) believes in building leaders through holistic, transformative and innovative education

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Return and Volatility Transmission between Gold and Stock Sectors: Application of Portfolio Management and Hedging Effectiveness

Vol 26, No 1; Article by Dilip Kumar; March 2014

The global stock markets have been hit by a series of crises over the past few decades. These crises have their origin in different economies but the spillover effects have been seen in important financial markets around the globe. Since 1999, the crises that hit India include the dot-com bubble crisis of 2000-2001, the US sub-prime crisis of 2007-2009, and the European debt crisis of 2010-2012. During these periods, the Indian stock market showed excessive volatility and a drastic drop in its values which has been a cause for concern to regulators, policy makers, financial institutions, portfolio managers, and financial analysts. Moreover, the uncertainty created in the financial markets due to excess volatility and the global crises has led major market participants to suffer considerably. Hence, portfolio managers and institutional investors need to be cautious while making investment decisions and look for potential hedging instruments. Gold exhibits almost all the properties that serve the criteria to be a hedging instrument. In addition, gold is a highly liquid asset and a well-developed market exists in India where daily trading in gold is possible.

The paper investigates the first and second orders moment transmission between gold and Indian industrial sectors with an application of portfolio design and hedging effectiveness using generalised VAR-ADCC-BVGARCH model. Our findings indicate unidirectional significant return spillover from gold to stock sectors. The negative values of estimated time varying conditional correlations are mainly observed during periods of market turbulence and crisis indicating the scope of portfolio diversification and hedging during these periods. We also estimate optimal weights, hedge ratios, and hedging effectiveness for the stock-gold portfolios. Our findings suggest that stock-gold portfolio provides better diversification benefits than stock portfolios.