Dynamic correlation and hedging ability of precious metals in pre- and post-COVID periods

Abstract

This study examines the dynamic correlations and hedge ratios of precious metal stock returns of the Johannesburg stock exchange in pre- and post-COVID scenarios to determine if they can be used to hedge against adverse market movements. The study uses daily return series of four gold stocks and three platinum stocks listed on the Johannesburg Stock Exchange (JSE) spanning from 11 November 2016 to 31 December 2019, for the pre-COVID period and 02 January 2020 to 10 February 2023, for the post-COVID period. Using t-copula-DCC-GJR-GARCH-skew-t and t-copula-aDCC-GJR-GARCH-skew-t models for pre- and post-COVID periods, respectively and the R-vine copula model for tail dependence analysis during times of extreme market conditions; our findings show that gold stocks are better hedge assets than platinum stocks during downturn market. Further, dynamic hedge ratios show that it is more expensive to hedge against long positions in the JSE index in the pre-COVID period than in the post-COVID period. Hedging effectiveness demonstrates that the dynamic portfolio weights strategy is better than hedge ratios when hedging against the JSE index. Based on the findings in this study, the economy of South Africa could possibly benefit if the government and the private sector reinvigorate the precious metal mining sector.

Keywords

• t-copula-DCC-GJR-GARCH-skew-t
• R-vine copula
• dynamic hedge ratios
• dynamic portfolio weights
• C13•C51•C58•G11
• Economics