Dependence between the global gold market and emerging stock markets (E7+1): Evidence from Granger causality using quantile and quantile‐on‐quantile regression methods

• DOI: http://doi.org/10.1111/twec.12775
• Date: 01 July 2019
• Published date: 01 July 2019

ORIGINAL ARTICLE

Dependence between the global gold market

and emerging stock markets (E7+1): Evidence

from Granger causality using quantile and

quantile‐on‐quantile regression methods

Aviral Kumar Tiwari

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Adeolu O. Adewuyi

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David Roubaud

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1

Montpellier Business School, Montpellier Research in Management, Montpellier, France

2

Trade Policy Research and Training Programme (TPRTP), Department of Economics, University of Ibadan, Ibadan,

Nigeria

3

Montpellier Business School, Montpellier Research in Management, Montpellier, France

KEYWORDS

emerging stock markets, gold market, quantile Granger causality, quantile-on-quantile regression

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INTRODUCTION

Stock markets play a key role in economic growth and development by facilitating economic activ-

ities through efficient financial resource mobilisation and allocation, liquidity, capitalisation, risk

sharing and diversification (Carp, 2012; Enisan & Olufisayo, 2008). Similarly, global gold markets

perform a critical function in the world's economies because gold is an instrument and source of

wealth when it is regarded as a commodity and monetary asset. In both the traditional and modern

settings, gold is a unit of account and medium of exchange (Gokmenoglu & Fazlollahi, 2015).

Stock and gold prices are predictors of expected inflation, a hedge against inflation, and critical

assets in portfolio allocation, diversification and economic security (Gokmenoglu & Fazlollahi,

2015; Kaufmann & Winters, 1989). Thus, volatility in the prices of stocks and gold may have

adverse effects on financial markets and the entire economy by engendering an unsafe investment

condition and disrupting both hedging decisions and derivative valuation (Baur & McDermott,

2010; Ewing & Malik, 2013). Therefore, knowledge of the relation between gold and stock prices

(and returns) is imperative for portfolio allocation and diversification (Tully & Lucey, 2007) to

minimise risks and maximise returns on investments.

The study of the link between assets began with the modern portfolio theory developed by

Markowitz (1952, 1959), in which the concept of portfolio diversification was incorporated into

the return (mean)‐risk (variance) framework. The goal of portfolio diversification is to max-

imise investors’wealth by combining risky assets with less risky or risk‐free assets in the

investment portfolio (Markowitz, 1952, 1959; Tobin, 1958). The risk‐return framework of anal-

ysis determines the relative attractiveness of one asset (stock) relative to another (gold). There-

fore, the need to diversify asset portfolios may be explained not only with respect to the

riskiness of individual assets, but also with respect to the effects of other factors, such as

Received: 20 October 2017

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Revised: 21 December 2018

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Accepted: 23 December 2018

DOI: 10.1111/twec.12775

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© 2019 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/twec World Econ. 2019;42:2172–2214.

economic fundamentals, business cycles and diverse behaviours of asset markets on assets'

returns (Markowitz, 1987, 1999; Ross, 1976). Thus, various assets or assets' markets respond

differently to economic fundamentals (interest, exchange and inflation rates), technological

changes and business cycle fluctuations.

International investors realised the significance of an alternative asset such as gold following

the effects of global financial crises on stocks' returns and investors' wealth (Gokmenoglu &

Fazlollahi, 2015). When the stock market returns fall as a result of slowing of the economy or a

global economic crisis, investors may shift their funds from local or foreign stocks to gold until

the economy rebounds. Further, gold is a good standard and store of value that is not susceptible

to the systematic risk inherent in stock. Thus, gold becomes a good alternative investment (hedge

or safe haven) when the business cycle collapses, and stock markets and exchange rates become

unfavourable and less attractive (Arfaoui & Rejeb, 2017). For example, when global gold prices

increased substantially from $611.3 per ounce in January 2007 to $1,835.52 per ounce in August

2011 (following the US sub‐prime crisis and sovereign debt crisis in European countries), it was

accompanied by a crash in stock prices. Further, recently, there has been a decrease in the price

of gold as stock markets have begun to rebound, as in April 2013.

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This development suggests

that knowledge of the relation between gold and stock markets is imperative for policymakers,

investors and analysts to aid in making effective decisions (Beckmann, Berger, & Czudaj, 2015;

Kumar, 2014).

Our study differs from earlier studies in this area in three ways. First, this study focused exclu-

sively on E7 countries (Brazil, China, India, Indonesia, Mexico, Russia and Turkey) and Korea

(E7+1), which are the major emerging economies that are predicted to evolve by 2020 to greater

economies than the G7 countries. These economies have stock markets that are among the stron-

gest in the World and have undergone both booms and busts over time (Bayraktar, 2014). They

also are among the top economies with large gold reserves (https://tradingeconomics.com/country-

list/gold-reserves). Because earlier studies have examined the dependency of gold and stock for the

G7 (and other selected groups, such as BRICS), it is equally important to examine this issue for

the E‐7 countries as a group to draw lessons for policy on international portfolio diversification

and hedging effectiveness. Second, this study was interested in the quantile dependence among

stock market indices and gold across the entire range of quantiles. This approach, which has been

applied in the literature recently, is able to identify asymmetries and provide rich information con-

cerning the correlation between markets under various conditions. Third, rather than focusing on

either the contemporaneous relations (with respect to regression analysis) or predictability (in the

Granger causality sense) as in previous studies, this study accomplished both by combining the

bivariate cross‐quantilogram Han, Linton, Oka, and Whang (2016) introduced recently with the

quantile‐on‐quantile regression (QQR) approach that Sim and Zhou (2015) developed. This

approach is considered worthwhile as it allows complementary analyses and provides robustness

checks. Fourth, given that the absence of theory and sound methods upon which empirical analysis

is based may hinder proper interpretation and understanding of results, unlike most previous stud-

ies, this current study adds to the existing literature by providing theoretical and methodological

bases for empirical analysis. This will aid understanding of the policymakers and policy analysts

(in the E7 and the World at large) of the concepts and strategies for optimal international portfolio

diversification and hedging effectiveness. It will guide them in using the results of the study for

making informed decisions to minimise losses and maximise returns on their assets. This is

because they will understand that gold can be a hedge for stock when it has either no or negative

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Information obtained from the World Bank's Global Economic Monitor database.

TIWARI ET AL.

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correlation with stock portfolios and a diversifier when it has a positive, but less than perfect corre-

lation with stock portfolios. Also, gold can be a safe haven for stock portfolio during extremely

unfavourable market conditions. These are the motivations for the theoretical analyses and empiri-

cal tests conducted in this study.

Therefore, this study examined the dependence between gold and stock markets for the seven

emerging (E7 + Korea) countries. The remainder of this paper is structured as follows: Section 2

provides the literature review, while Section 3 explains the methodology of the study. Section 4

presents and discusses the empirical results, and Section 5 summarises the paper with policy

implications.

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LITERATURE REVIEW

The literature on the dynamic relations among various commodity prices and the stock market is

extensive and widespread across major regions of the world. These relations have been explored

for the global market (Kang, McIver, & Yoon, 2017; Reboredo & Ugolini, 2017; Sadorsky, 2014),

cross countries (Ciner, Gurdgiev, & Lucey, 2013; Choudhry, Hassan, & Shabi, 2015; Raza, Shah-

zad, Tiwari, and Shahbaz (2016), Asia (Arouri, Lahiani, & Nguyen, 2015; Bouri, Jain, Biswal, &

Roubaud, 2017a; Bouri, Roubaud, Jammazi, & Assaf, 2017b; Huang, An, Gao, & Huang, 2016;

Kumar, 2014; Mensi, Hammoudeh, Reboredo, & Nguyen, 2015; Ziaei, 2012), Europe (Charlot &

Marimoutou, 2014; Hoang, Lean, & Wong, 2015; Shahzad, Raza, Shahbaz, & Ali, 2017), United

States (Akgül, Bildirici, & Özdemir, 2015; Baruník, Kočenda, & Vácha, 2016; Baumöhl &

Lyócsa, 2017; Bekiros, Nguyen, Uddin, & Sjö, 2016; Creti, Joëts, & Mignon, 2013; Gokmenoglu

& Fazlollahi, 2015; Hood & Malik, 2013; Mensi, Beljid, Boubaker, & Managi, 2013) and Aus-

tralia (Bekiros, Hernandez, Hammoudeh, & Nguyen, 2015).

Much empirical evidence appears to support gold's role as both a hedge and a safe haven in

times of stock market volatility. For example, Baur and McDermott (2010) explored the role of

gold in the global financial system using the maximum‐likelihood approach. The study covered the

G7 and BRIC countries, as well as Australia and Switzerland in a monthly series that ranged from

March 1979 to March 2009. The results indicated that gold is both a hedge and a safe haven for

large stock markets in Europe and the United States, while it is not a hedge in Australia, Canada,

Japan and the BRIC countries. Further results revealed that gold may act as a moderating force for

the financial system by reducing losses in the face of extreme negative market shocks. In the same

vein, Hood and Malik (2013) conducted a similar study under conditions of changing stock market

volatility using US daily data from November 1995 to November 2010. The results from a correla-

tion and regression analyses provided evidence that, among precious metals, gold provides a hedge

and a safe haven for the US stock market, although its role as a safe haven is weak. However, in

periods of extremely low or high volatility, gold is not correlated negatively with the US stock

market, while the volatility index performs better as a hedging tool and safe haven. Also, Gürgün

and Ünalmış (2014) examined the case of emerging and developing countries using daily data

spanning the period from January 1980 to September 2013. Employing the GARCH (1,1)

approach, their empirical results demonstrated that in the majority of the countries studied, gold

was both a hedge and a safe haven for domestic investors. Similar results also were found for the

post‐2008 crisis period. In addition, gold served as a safe haven for both domestic and foreign

investors when there were severe declines in equity market returns in the majority of countries.

Similar findings were obtained by Kumar (2014) for Indian stocks and Beckmann et al. (2015) for

country specific and regional stocks.

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