Artha Vijnana: Journal of The Gokhale Institute of Politics and Economics

Santhosh Kumar ¹, M. A. Lagesh ²

Affiliations
1 Department of Economics, Christ University, Bangalore 560029, IN
2 Department of Economics, University of Hyderabad, Hyderabad 500046, IN

Abstract

A safe haven can be broadly defined as an asset allowing the preservation of wealth during financial turmoil. This can be characterized by looking at its negative correlations with risky assets specifically during crises. The present paper employs a Dynamic Conditional Correlation Autoregressive Conditional Heteroskedasticity (GARCH) Dynamic Conditional Correlation (DCC) (DCC-GARCH) model proposed by Engel (2002) to test the safe haven property of gold against stock market in India during the recent financial crisis. For the purpose we utilize 3001 daily observations (after adjusting for the dates and missing observations due to holidays) on gold price and BSE SENSEX index closing price from 1^st January, 1998 to 30^th September, 2009. The empirical evidence is consistent with the study by Baur and Lucey (2010) that gold is a safe haven and hedge in extreme stock market conditions.

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Puja Padhi ¹, M. A. Lagesh ²

Affiliations
1 Department of Humanities and Social Sciences, Indian Institute of Technology Bombay, Powai, Mumbai 400076, IN
2 Department of Economics, University of Hyderabad, Hyderabad 500046, IN

Abstract

This study looks at the relationship between stocks and bond market of India from December 2003 to March 2010. It examines whether the correlations between the two classes of assets are time-varying by using multivariate conditional volatility models. We start our investigation by Bollerslev (1990) Constant conditional correlation model to test whether varying correlations are statistically significant. Then we use a DCC-GARCH (1, 1) model proposed by Engle (2002) to analyze the dynamics of conditional correlations between the two assets. Our empirical results do not support the assumption of constant conditional correlation. There is clear evidence of time varying correlations between Indian stocks and bond market.

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