Do Gold and Crude Oil Act as Portfolio Diversifiers, Safe Haven Assets or Hedge Instruments Against Volatility in Stock Markets and Exchange Rates? Evidence from Sub-Saharan Africa

This paper examines whether gold and crude oil are used as diversifying, hedging or as safe haven assets against stock markets and exchange rate volatility in selected African countries. We use daily data for South Africa, Kenya and Nigeria from 4th January 2005 to 31st December 2018 and apply different techniques, including the Dynamic Conditional Correlation and the Spillover Index to decipher the financial market characteristics of the two commodities during periods of market stress. The findings show that: (i) countries use gold and oil as diversifiers and safe haven assets rather than as a hedge instrument; (ii) the Nairobi Stock Exchange and Johannesburg Stock Exchange are the largest volatility contributors to other markets; (iii) while Nairobi stock exchange and gold are net transmitters of risk, and; (iv) currency markets are net receivers of risk transfer. We find heterogeneous results during periods of crisis. Specifically, during the period of COVID-19 pandemic, gold’s attributes of portfolio diversifier and safe haven instrument increase, and acting as a hedge asset. Similarly, the Nigeria currency market and Johannesburg Stock Market are the largest net volatility transmitters while the Kenyan currency market and Nairobi Stock Exchange are net receivers of volatility. Our results highlight the significance of the characteristics of the two commodity assets for investors and financial markets.