Identifying safe haven assets for equity investors through an analysis of the stability of shock transmission

•We seek to identify safe haven assets from the perspective of a U.S. equity investor.•We analyse the suitability of gold, 10- and 1-year Treasury bonds.•Our regime-switching model decomposes returns into common and idiosyncratic factors.•Both gold and long-term Treasury bonds satisfy our definition...

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Bibliographic Details
Published in:Journal of international financial markets, institutions & money institutions & money, 2014-11, Vol.33, p.137-154
Main Authors: Flavin, Thomas J., Morley, Ciara E., Panopoulou, Ekaterini
Format: Article
Language:English
Subjects:
Equity
Financial market crises
Fund management
Hedging
Investors
Portfolio management
Regime switching
Risk
Risk factors
Safe haven assets
Securities markets
Shock transmission
Studies
Treasury
Treasury bonds
U.S.A
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Summary:•We seek to identify safe haven assets from the perspective of a U.S. equity investor.•We analyse the suitability of gold, 10- and 1-year Treasury bonds.•Our regime-switching model decomposes returns into common and idiosyncratic factors.•Both gold and long-term Treasury bonds satisfy our definition of a safe haven asset.•The equity-1-year bond combination exhibits bi-directional contagion. Our analysis takes the perspective of an equity fund manager who seeks a potential safe haven asset to protect her portfolio during market downturns. We employ a regime-switching framework, within which we separate common and idiosyncratic shocks, to assess the suitability of gold, 10-year and 1-year U.S. Treasury bonds. We find evidence in favour of choosing either gold or the longer-dated bond as our safe haven asset. Both deliver risk reduction benefits as equity markets plunge. In contrast, the 1-year bond is not suitable as its vulnerability to contagious idiosyncratic shocks more than offsets its ability to hedge against common risk factors.
ISSN:1042-4431
1873-0612
DOI:10.1016/j.intfin.2014.08.001