Hedging Effectiveness of Gold: an Analysis for the Banking Sector With Different Dynamic Portfolio Approaches

Abstract

In this study, we construct portfolios including gold and six major stock exchanges (& Idot;sbank, Garanti Bank, Akbank, Yap & imath; Kredi Bank, Halkbank, Aand Vak & imath;fbank) by using three different dynamic portfolio approaches (i.e., minimum variance, minimum correlation, and minimum connectedness approaches). The aim of the study is to investigate whether gold can be used as a hedge against six major banks operating in Turkey. Further, this study also aims to measure the hedging effectiveness of gold. We adopt a fully time- varying parameter vector auto-regression (TVP-VAR) econometric framework, applied to daily data spanning June 2018 to November 2022. Empirical results show that the optimal ratio of gold in bank stocks varies between 39% and 53%, depending on time and portfolio construction approach. It is observed that the volatility of bank stocks in the portfolios has decreased by approximately 75%. According to the MCP and MCoP approaches, the highest return was obtained from the portfolio constructed with the MVP approach. In addition, the empirical findings show that gold can be used as a hedging instrument against banking stocks in bear market conditions.