In this study, we model the volatility dynamics of Istanbul Gold Exchange with several GARCH models, which incorporate asymmetry and long-range dependence in the conditional volatility. We use daily spot prices of the gold exchange from January 4, 2006 to November 20, 2013. In addition, forecasting performances of the models are evaluated based on three commonly used measures. We examine the out-of-sample predictions for 1, 5 and 20-days ahead as the portfolio managers usually focus on longer horizons (20-days) as well as relatively short horizons (1 and 5-days ahead). The forecasting results point out the superior performance of EGARCH and CGARCH models. Hence our results provide useful information for investors and portfolio managers to consider asymmetric reactions to the news and long-range dependence property of the gold market in Turkey.

This paper investigates whether gold acts as a safe haven, a hedge or a diversifier for stocks and bonds in Turkey. We employ the dynamic conditional correlation (DCC-GARCH) model which is a class of multivariate generalized autoregressive conditional heteroskedastic (GARCH) models. DCC-GARCH has two steps; the first step models the volatility dynamics in a univariate context and the second step involves computing dynamic correlations. We use daily data from June 2006 to November 2013, a period witnessing the most recent global financial crisis and its aftermath. Our univariate GARCH model results reveal that current volatility is conditional on past shocks and volatilities for gold, stocks and bonds in Turkey. In this study, we hypothesize that gold is a hedge if the gold and the asset class are uncorrelated or negatively correlated on average, while it is a safe haven if the correlations are negative in times of market stress. The second step analyses show that gold acts as a hedge on average and a safe haven during equity market downturns for stocks. Across bonds, we show that gold acts as a hedge on the average, however it is not a safe haven during turmoil periods. Our results are of significance for portfolio managers, international investors and policy makers.

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