Is this time really different? Flight-to-safety and the COVID-19 crisis

Abstract

During periods of market stress, risk-averse investors reallocate their investments from stocks to gold in a bid to hedge risks. Market participants interpret the induced gold price increase as an indication of safe-haven purchases and a signal of increased uncertainty in the general economic and financial conditions, thereby causing higher gold price volatility. The aim of this paper is to analyze whether this flight to safety effect can be observed during the COVID-19 crisis, which is considered to be a one-of-a-kind crisis and obviously of different origin compared to previous (financial) crises. By examining the interactions between the (option-implied) volatilities of the stock market (VIX) and of the gold (GVZ) and oil (OVX) markets, the main findings indicate that there is a granger causality in general between the equity market and the gold as well as the oil market. During the COVID-19 crisis, a stronger influence of the equity market on the oil market can be observed. Based on symmetric causality tests that are typically employed in the literature, this cannot be observed for the gold market. However, once we control for asymmetric causal interactions, we find that positive shocks in VIX cause positive shocks in GVZ. Hence, the typical flight to safety effect, similar to the one observed during other (financial) crises can also be identified for the COVID-19 crisis. The causality between the equity and oil market is triggered by political factors as well as the economic impact of the crisis which induces a sharp drop in demand for oil.

Informational Efficiency of the Us Markets for Implied Volatility Before and After the Covid-19 Pandemic

“…A possible explanation lies in the existence of uncertainty spillovers. The relevant literature (e.g., Badshah et al 2013a;Liu et al, 2013;Lowen et al, 2021) has pointed to a number of direct and indirect transmission channels among the implied volatility markets including the flight-to-safety effect, the impact of exchange rate volatility on firms that are not fully hedged, and the financialization of commodities.…”

The interconnectedness across risk appetite of distinct investor types in Borsa Istanbul

“…It is found that OVX and VIX have a significant spillover effect on US sectoral returns, which is exacerbated by the impact of the coronavirus outbreak. Furthermore, Löwen et al (2021) investigated the relationship between VIX, GVZ and OVX and discovered that VIX to GVZ and OVX has a Granger causality. The influence of VIX on GVZ gained strength during the COVID-19 outbreak, and positive shocks in VIX induced positive shocks in GVZ.…”

Forecasting extreme negative returns in gold and silver: A discrete‐duration approach to POT models

“…Nevertheless, the COVID-19-induced economic anxiety has placed a heavy toll on financial markets in terms of the increased volatility, which also afflicts gold and silver markets. [1][2][3] The recent Russia-Ukraine war also escalated uncertainty about the economic outlook; furthermore, it emphasized the need for models that are able to accurately predict the risk of devastating losses. In light of these events, investors have become especially interested in accurate risk management of their commodity portfolios.…”

“…Furthermore, they are sometimes prone to inefficiency or a bubble behavior 18,19 as well as they often serve as hedge instruments. [20][21][22] Many studies on precious metals volatility, [23][24][25] or the interconnectedness between precious metals and other assets 2,3,26 have recently been put forward. Nevertheless, to the best of our knowledge, the dynamics of extreme events have been-thus far-overlooked, and so this study aims to fill in gap within the literature.…”