Examining the hedge performance of US dollar, VIX, and gold during the coronavirus pandemic: Is US dollar a better hedge asset?

Seok-Jun Yun; Sun-Yong Choi; Young Sung Kim

doi:10.1371/journal.pone.0291684

Examining the hedge performance of US dollar, VIX, and gold during the coronavirus pandemic: Is US dollar a better hedge asset?

PLoS One. 2023 Oct 5;18(10):e0291684. doi: 10.1371/journal.pone.0291684. eCollection 2023.

Authors

Seok-Jun Yun¹, Sun-Yong Choi¹, Young Sung Kim²

Affiliations

¹ Department of Financial Mathematics, Gachon University, Seongnam, Republic of Korea.
² Head of A.I. Platform Trading Division, SK Securities, Seoul, Republic of Korea.

Abstract

This study utilizes the hedging potential of the U.S. Dollar Index (USDX) during the COVID-19 period, specifically comparing its positive effects on optimal portfolio weights and hedging ratios with those of traditional hedging assets, such as the VIX and gold. The scalar BEKK GARCH model is employed to forecast volatility and calculate hedging indicators. The results show that USDX exhibits strong hedging abilities against S&P 500 index volatility. These findings highlight the advantageous role of the USDX as a hedging instrument, particularly during periods of heightened market uncertainty, such as during the COVID-19 crisis. Despite the increased market volatility during the COVID-19 pandemic, the value of the optimal portfolio weights is stable and the volatility of the weights is significantly reduced, demonstrating the strength of the USDX's low risk and volatility in hedging against market fluctuations. Moreover, the increase in the hedge ratio indicates that more capital is allocated to hedging, reflecting the increased correlation between the USDX and S&P 500 index. These results emphasize the beneficial role of the USDX as a hedging instrument during times of elevated market uncertainty, such as during the COVID-19 crisis. Ultimately, USDX can provide valuable insights for market participants seeking effective hedging strategies.

Copyright: © 2023 Yun et al. This is an open access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.

Publication types

Research Support, Non-U.S. Gov't

MeSH terms

COVID-19* / epidemiology
Gold
Humans
Pandemics*
Uncertainty

Substances

Gold

Grants and funding

The work of S.-Y. Choi was supported by the National Research Foundation of Korea grant funded by the Korean Government (No. 2021R1F1A1046138). The funders had no role in study design, data collection and analysis, decision to publish, or preparation of the manuscript. The funder (SK securities) provided support in the form of salaries for author YS, Kim, but did not have any additional role in the study design, data collection and analysis, decision to publish, or preparation of the manuscript. The specific roles of these authors are articulated in the ‘author contributions’ section.