The financial globalization and interdependence among financial security markets in recent times has complicated the task of diversifying investment portfolio positions, exposing security markets to higher contagion risks (the risk of financial difficulties at one bank spilling over to other banks).
Precious metals are regarded as financial assets which can mitigate these security investment portfolios risks. In fact, precious metals have recently been found to be negatively correlated with financial equity markets, highlighting their potential in the diversification and hedging of financial portfolio positions. However, no study has previously analyzed the portfolio risk characteristics and spillovers of precious metals commodities and equity markets across continents.
Now, a team of economists comprising Dr. Jose Arreola Hernandez from Rennes School of Business, France, and Dr. Sang Hoon Kang and Dr. Seong-Min Yoon from Pusan National University, Republic of Korea, have conducted this analysis in a new study published in Applied Economics.
“What precious metal commodities most largely spillover on the equity indices? What precious metals add the most/least risk to my portfolio? What precious metals are most desirable for investment? These are the closely linked questions we wanted to explore in this study,” says Dr. Yoon, speaking of his motivation behind the study.
The team analyzed the relationship between the returns of nine precious metals: gold, silver, palladium, platinum, nickel, lead, zinc, copper, and aluminum. Furthermore, they analyzed the “spillover index” between these metals and regional/global equity markets, and performed a portfolio optimization using a differential evaluation method.
The findings revealed that the largest spillovers among precious metals occur between gold and silver and between zinc and lead, while the largest spillovers of the world, the Americas, Europe, and Asia Pacific equity indices are on palladium and copper.
Metals that most largely spillover on the equity indices of the world and the Americas are copper and zinc, on the equity indices of Europe are copper and lead, and on the equity indices of Asia Pacific are copper and silver. Additionally, nickel and lead add the highest risk to total portfolio risk, while platinum, gold and aluminum add the least risk to the portfolio of commodities. The most desirable metals for investment were found to be gold and aluminum.
How are these findings important? Dr. Yoon explains, “Understanding the relationship between precious metal and equity markets across continents and the world, as well as the role of precious metals in financial investment, is relevant for investors looking to protect their investment portfolios during financial turmoil and market downturns”.
These findings can, thus, help portfolio investors with portfolio risk management and creation of hedging strategies. Moreover, financial policy makers can benefit from this study by gaining relevant insight on how the inclusion of precious metals can help them with important financial investment decisions.
About Pusan National University
Pusan National University, located in Busan, South Korea, was founded in 1946, and is now the no. 1 national university of South Korea in research and educational competency. The multi-campus university also has other smaller campuses in Yangsan, Miryang, and Ami. The university prides itself on the principles of truth, freedom, and service, and has approximately 30,000 students, 1200 professors, and 750 faculty members. The university is composed of 14 colleges (schools) and one independent division, with 103 departments in all.
About the authors
Jose Arreola Hernandez is an Associate Professor of Esc Rennes School of Business, France. He received a PhD in Finance from School of Business, Edith Cowan University, Australia. His main interest is to analyse and manage the investment risk and portfolio risk.
Sang Hoon Kang is a Professor of Department of Business Administration, Pusan National University, Republic of Korea. He received a PhD in Financial Economics from University of South Australia, Australia. He has published many academic journal papers, in particular, on modelling and forecasting the volatility of financial time series.
Seong-Min Yoon is a Professor of Department of Economics, Pusan National University, Republic of Korea. He holds a PhD in Economics from Korea University, Republic of Korea. He has been a visiting scholar of the University of Washington in Seattle and the University of Colorado in Denver, USA. His research fields include financial market dynamics, international finance, regional economics, and applied econometrics. He has published over 330 academic papers in refereed journals.
Method of Research
Subject of Research
Spillovers and portfolio optimizations of precious metals and global/regional equity markets
Article Publication Date
No potential conflict of interest.