Hedging oil price risk with gold during COVID-19 pandemic

Afees A Salisu; Xuan Vinh Vo; Adedoyin Lawal

doi:10.1016/j.resourpol.2020.101897

Hedging oil price risk with gold during COVID-19 pandemic

Resour Policy. 2021 Mar:70:101897. doi: 10.1016/j.resourpol.2020.101897. Epub 2020 Oct 10.

Authors

Afees A Salisu^{1

2}, Xuan Vinh Vo^{2

3}, Adedoyin Lawal⁴

Affiliations

¹ Centre for Econometric & Allied Research, University of Ibadan, Ibadan, Nigeria.
² Institute of Business Research, University of Economics Ho Chi Minh City, Viet Nam.
³ Institute of Business Research and CFVG Ho Chi Minh City, University of Economics Ho Chi Minh City, Viet Nam.
⁴ Dept. of Accounting and Finance, Landmark University, Omu Aran, Nigeria.

Abstract

This paper assesses the role of gold as a safe haven or hedge against crude oil price risks. We employ the asymmetric VARMA-GARCH model, using daily data from January 2016 to August 2020. To account for the impact of COVID-19 pandemic, we partitioned the data into two to reflect the periods before and during the pandemic. Our empirical results find gold as a significant safe haven against oil price risks. The optimal portfolio and hedging analyses conducted also validate the hedging effectiveness of gold against risk associated with oil. The robustness of our results is further confirmed using three other prominent precious metals - silver, platinum, and palladium. In sum, our results are useful for investors and portfolio managers that are desirous of using gold and other precious metals as portfolio rebalancing tools to minimize or circumvent risks associated with volatile oil returns.

Keywords: Gold; Hedging; Oil; Safe haven; VARMA GARCH.