Gold vs. PSX sectors during political uncertainties: an event study analysis

Abstract

Amplified uncertainties in economic, financial, and political environments across nations have created a dire need to search for safe investment options that could mitigate the losses faced by investors. Consequently, researchers and investment managers have started investigating alternative investment options like real assets to cope with such risks. Since Pakistan is among the most politically unstable economies, there is a dire need to investigate this conundrum and provide Pakistani investors with alternatives. Previous researches have widely reported gold to be this alternative as it provides a hedge and safe haven during various economic downturns. Therefore, the current study investigates whether gold could also diversify the risk of political uncertainties faced by different sectors of the Pakistan stock exchange (PSX). For this purpose, initially the impact of political uncertainty on PSX sectors and gold is investigated through event study analysis, by using economically political and socio-political events from Jan 2009 to Dec 2019. Then Pearson correlation and volatility modeling using event dummies are employed to unveil the diversification characteristics of gold. Gold holds diversification characteristics in case it exhibits zero, negative or insignificant correlations with PSX sectors. Findings suggest that gold is not influenced by political events while most of the PSX sectors are influenced by socio or economical political events. The results also show that gold acts as a hedge for all sectors i.e. indicating zero correlation, and acts as a safe haven for many sectors i.e., it indicates a negative correlations, and an insignificant relationship indicating the absence of co-movement. Therefore, the study concludes that Pakistani investors could consider gold as a diversifier for diversifying traditional investment portfolios.

Keywords

• gold
• political uncertainty
• event study
• volatility modeling