Gold, Oil, and Stocks

TL;DR

This study uses wavelet-based time-frequency analysis to examine the dynamic correlations between gold, oil, and stocks from 1987 to 2012, revealing heterogeneity during crises and implications for diversification.

Contribution

It introduces a wavelet approach to analyze asset correlations across multiple investment horizons during different economic periods.

Findings

Correlations vary across investment horizons during economic downturns.

Post-2008, correlations among assets increase and become more homogeneous.

Diversification benefits are limited to short periods during turbulent times.

Abstract

We employ a wavelet approach and conduct a time-frequency analysis of dynamic correlations between pairs of key traded assets (gold, oil, and stocks) covering the period from 1987 to 2012. The analysis is performed on both intra-day and daily data. We show that heterogeneity in correlations across a number of investment horizons between pairs of assets is a dominant feature during times of economic downturn and financial turbulence for all three pairs of the assets under research. Heterogeneity prevails in correlations between gold and stocks. After the 2008 crisis, correlations among all three assets increase and become homogenous: the timing differs for the three pairs but coincides with the structural breaks that are identified in specific correlation dynamics. A strong implication emerges: during the period under research, and from a different-investment-horizons perspective, all three assets could be used in a well-diversified portfolio only during relatively short periods.