Hedge, Diversifier and Safe Haven Properties of Precious Metals against UK Stocks During COVID-19 Pandemic

Article Information

Title: Hedge, Diversifier and Safe Haven Properties of Precious Metals against UK Stocks During COVID-19 Pandemic

Authors: Ikram Ul Haq, Farzan Aslam, Fakhra Aslam

Journal: Dialogue Social Science Review (DSSR)

HEC Recognition History

Category	From	To
Y	2024-10-01	2025-12-31

Publisher: Collaborative Educational Learning Institute

Country: Pakistan

Year: 2024

Volume: 2

Issue: 5

Language: English

Abstract

This research study examines the hedging, safe haven, also diversification properties of precious metals, specifically silver, gold, and platinum, in relation to the UK stock market. To evaluate the hedging and safe haven qualities of precious metals, this research paper uses a multivariate vine copula-based GARCH model. To investigate the diversification ability of precious metals, a Bivariate Value at Risk-based copula (BiVaR) method are utilized. According to our empirical findings, which are in line with earlier research, gold, a precious metal, offers the UK the best safe haven property during the COVID-19 pandemic. Gold may thus be used to counteract equities market losses during turbulent times. Nevertheless, since silver is supplementary lightly traded, commanding it most illiquid and volatile, it is not seen as a safe haven asset for the other UK stock markets. Regarding platinum, it is a poor hedge and a gold mine for the UK stock market. Additionally, consistent with previous research, our analysis indicates that gold maintains a powerful hedging ability in established stock markets. The findings suggest that platinum and silver might function as weak hedging assets. Lastly, all precious metals show diversification advantages for investors in UK stock markets, according to the BiVaR analysis's findings. Overall, our findings may be quite advantageous to investors.

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Research Objective

To examine the hedging, safe haven, and diversification properties of precious metals (silver, gold, and platinum) in relation to the UK stock market during the COVID-19 pandemic.

Methodology

The study employs a multivariate vine copula-based GARCH model to evaluate hedging and safe haven qualities, and a Bivariate Value at Risk-based copula (BiVaR) method to investigate diversification abilities. Daily price data for silver, gold, platinum, and the FTSE 100 (UK stock market index) from January 1, 2013, to May 5, 2023, were used. Returns were calculated as log differences of prices.

Methodology Flowchart

                        graph TD
    A["Data Collection: Daily prices of Gold, Silver, Platinum, FTSE 100 2013-2023"] --> B["Calculate Log Returns"]
    B --> C["Model Selection"]
    C --> D["GARCH Model: Filter returns to obtain residuals"]
    D --> E["Vine Copula D-vine, C-vine: Estimate marginal models and pair-copula parameters"]
    E --> F["Evaluate Safe Haven & Hedge Properties: Analyze tail correlation"]
    E --> G["Evaluate Diversification Properties: BiVaR analysis"]
    F --> H["Analyze Results"]
    G --> H
    H --> I["Draw Conclusions & Implications"]

Discussion

The research combines copula and VaR approaches to provide an updated description of safe haven assets. Gold's historical role as money, its liquidity, and its global nature contribute to its safe haven status. Silver's lower price makes it a potentially viable, albeit weak, safe haven and hedge. Platinum's illiquidity limits its safe haven appeal. The BiVaR analysis confirms the diversification benefits of precious metals.

Key Findings

Gold demonstrated the strongest safe haven property for the UK during the COVID-19 pandemic. Silver was not considered a safe haven due to its illiquidity and volatility. Platinum was found to be a weak hedge and a poor safe haven for the UK stock market. All precious metals showed diversification advantages for UK investors. Gold also maintained a powerful hedging ability in established stock markets.

Conclusion

Precious metals, particularly gold, offer significant benefits to UK investors for hedging, safe haven strategies, and diversification. Gold is a strong hedge and safe haven, while silver and platinum act as weak hedging assets and offer diversification advantages. Investors can use these metals to hedge equity investments during normal times and protect portfolios during volatile periods.

Fact Check

1. Data Period: The research period spans from January 1, 2013, to May 5, 2023.
2. Precious Metals Analyzed: The study specifically examines gold, silver, and platinum.
3. UK Stock Market Index: The FTSE 100 is used as the proxy for the UK stock market.

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