Gold and Islamic stocks: A hedge and safe haven comparison in time frequency domain for BRICS markets

This paper investigates the role of safe haven assets i.e. gold and Islamic stocks in time-frequency domain for two different crises periods. Wavelet coherency squared coherence approach has been utilized on daily data of gold, DJIEM and stock returns of the BRICS markets for the period from January 1st 1996 to December 31st 2014. The results indicate that gold maintain its role as hedge for stock markets over short-run. In both crises periods, gold exhibits low correlation with stock markets. Over all, our results suggest that the hedge and safe haven ability of gold is market specific. Therefore, in Asian financial crises, gold proves as a strong safe haven for BRICS and Islamic index. However, in late 2005, gold prices start moving with BRICS equitey markets and show positive correlation for 32-128 days scale. This relationship effects gold’s ability to act as a financial protector against extreme negative shocks in global financial crises of 2007-09. In contrast, gold leads world Islamic emerging markets and displays negative relation across a range of frequencies and indicates safe haven effects for the returns of Islamic stock markets. This low correlation between gold and Islamic stock markets indicates that gold can provide diversification to the portfolios of Islamic stock markets. Panel cointegration analysis depicts that the Islamic emerging and BRICS equity markets are cointegrated and global investor should have to carefully monitor the risk associated with them. Based on these results we infer that gold investment has potential to safe guard the stock portfolios in short-run against extreme negative market shocks. However, in long-run, gold does not seem to be a strong safe haven. Further, Dow Jones world Islamic emerging market index shows low correlation with only conventional stock market of China. This suggests significant diversification benefits of Islamic stocks for Chinese investors.