Publication
Gold as a Hedge Against Geopolitical Risk. A MF-DCCA Approach
| Summary: | Gold is often considered to be a safe haven asset and a hedge against geopolitical risk. This dissertation investigates the efficacy of gold as a hedge against geopolitical risk through a Multifractal Detrended Cross-Correlation Analysis (MF-DCCA). This manuscript analyses daily price data of Gold, S&P500, DAX40, DXY, Nikkei225, and WTI from 2006 to 2022 sourced from Investing.com, and studies the performance of these assets during periods of heightened Geopolitical Risk Index and its two sub-indexes: the Geopolitical Risk Act Index and the Geopolitical Risk Threat Index. The research tests three hypotheses: whether Gold loses its safe haven attributes during times of increased geopolitical risk, whether its ability to offset downside risk is lower than other assets, and whether cross-correlations between assets and geopolitical risk present multifractal properties.The findings suggest that all assets exhibit long-range correlations with geopolitical risk and its sub-indexes, confirming the presence of multifractality. The research demonstrates significant temporal variations across different market regimes, with Gold's relationship with geopolitical risk evolving from the 2008-2009 financial crisis through the COVID pandemic. In the full period analysis, Gold demonstrates more pronounced anti-persistence than most other assets (except S&P500), indicating more rapid mean-reverting behaviour in response to geopolitical shocks. This stronger anti-persistence suggests Gold functions effectively as a short-term hedge where investors quickly move to Gold during crises but sell once the situation begins to stabilise. The pattern varies across different market regimes, however, with Gold's behaviour during the COVID crisis challenging traditional safe haven narratives. These findings align with recent research showing that Gold's cross-correlations with financial markets can shift significantly during extreme market conditions, demonstrating that Gold's effectiveness as a safe haven is context-dependent and varies based on the specific nature of the crisis. Overall, the research reveals a more nuanced understanding of Gold's relationship with geopolitical risk than traditionally understood, while still affirming its generally superior position relative to other assets during most periods of geopolitical uncertainty. |
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| Main Authors: | Moreira, Jorge Manuel Barbosa Mota |
| Subject: | Multifractality Multifractal Detrended Cross-Correlation Analysis (MF-DCCA) Geopolitical Risk Gold Financial Markets Multifractalidade Análise de Correlação Cruzada Desdetrendizada Multifractal (MF-DCCA) Risco geopolítico Ouro Mercados financeiros |
| Year: | 2025 |
| Country: | Portugal |
| Document type: | master thesis |
| Access type: | open access |
| Associated institution: | Universidade de Coimbra |
| Language: | English |
| Origin: | Estudo Geral - Universidade de Coimbra |
| Summary: | Gold is often considered to be a safe haven asset and a hedge against geopolitical risk. This dissertation investigates the efficacy of gold as a hedge against geopolitical risk through a Multifractal Detrended Cross-Correlation Analysis (MF-DCCA). This manuscript analyses daily price data of Gold, S&P500, DAX40, DXY, Nikkei225, and WTI from 2006 to 2022 sourced from Investing.com, and studies the performance of these assets during periods of heightened Geopolitical Risk Index and its two sub-indexes: the Geopolitical Risk Act Index and the Geopolitical Risk Threat Index. The research tests three hypotheses: whether Gold loses its safe haven attributes during times of increased geopolitical risk, whether its ability to offset downside risk is lower than other assets, and whether cross-correlations between assets and geopolitical risk present multifractal properties.The findings suggest that all assets exhibit long-range correlations with geopolitical risk and its sub-indexes, confirming the presence of multifractality. The research demonstrates significant temporal variations across different market regimes, with Gold's relationship with geopolitical risk evolving from the 2008-2009 financial crisis through the COVID pandemic. In the full period analysis, Gold demonstrates more pronounced anti-persistence than most other assets (except S&P500), indicating more rapid mean-reverting behaviour in response to geopolitical shocks. This stronger anti-persistence suggests Gold functions effectively as a short-term hedge where investors quickly move to Gold during crises but sell once the situation begins to stabilise. The pattern varies across different market regimes, however, with Gold's behaviour during the COVID crisis challenging traditional safe haven narratives. These findings align with recent research showing that Gold's cross-correlations with financial markets can shift significantly during extreme market conditions, demonstrating that Gold's effectiveness as a safe haven is context-dependent and varies based on the specific nature of the crisis. Overall, the research reveals a more nuanced understanding of Gold's relationship with geopolitical risk than traditionally understood, while still affirming its generally superior position relative to other assets during most periods of geopolitical uncertainty. |
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