Hedging with financial innovations in the Asia-Pacific markets during the COVID-19 pandemic: the role of precious metals

Abdulsalam Abidemi Sikiru; Afees A. Salisu; Abdulsalam Abidemi Sikiru; Afees A. Salisu

doi:10.3934/QFE.2021016

Quantitative Finance and Economics

2021, Volume 5, Issue 2: 352-372. doi: 10.3934/QFE.2021016

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Hedging with financial innovations in the Asia-Pacific markets during the COVID-19 pandemic: the role of precious metals

Abdulsalam Abidemi Sikiru ¹,
Afees A. Salisu ^{2
,
,}

1.
Research and Statistics Department, West African Monetary Agency, Sierra Leone and Monetary Policy Department, Central Bank of Nigeria, Nigeria
2.
Centre for Econometric and Allied Research, University of Ibadan, Ibadan, Nigeria

Received: 17 March 2021 Accepted: 13 May 2021 Published: 20 May 2021
JEL Codes: C58, F21, G10, G15

In this study, we exploit the information contained in financial innovations in precious metals for hedging the risks associated with the Asia-Pacific equities during the current pandemic. We measure financial innovations as exchange traded funds (ETFs) for gold, silver, platinum and palladium which contrast with investment in the physical precious metals since the former tracks well the prices of the latter and as well provides cost-effective alternative to invest in the markets without storage costs. Based on the optimal portfolio weights and optimal hedge ratios, we find that gold offers the best hedge (followed by silver, platinum, and palladium) against the risk associated with the Asia-Pacific equities during the COVID-19 pandemic albeit with a lower hedging effectiveness during the pandemic. Overall, including gold ETFs in an Asia-Pacific equity portfolio would provide both a valuable portfolio combination that could improve the risk-adjusted performance of the market in addition to serving as an effective hedge for equity-related risks.
- financial innovation,
- hedge,
- precious metals,
- ETFs,
- Asia Pacific equity market
Citation: Abdulsalam Abidemi Sikiru, Afees A. Salisu. Hedging with financial innovations in the Asia-Pacific markets during the COVID-19 pandemic: the role of precious metals[J]. Quantitative Finance and Economics, 2021, 5(2): 352-372. doi: 10.3934/QFE.2021016

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Abstract

In this study, we exploit the information contained in financial innovations in precious metals for hedging the risks associated with the Asia-Pacific equities during the current pandemic. We measure financial innovations as exchange traded funds (ETFs) for gold, silver, platinum and palladium which contrast with investment in the physical precious metals since the former tracks well the prices of the latter and as well provides cost-effective alternative to invest in the markets without storage costs. Based on the optimal portfolio weights and optimal hedge ratios, we find that gold offers the best hedge (followed by silver, platinum, and palladium) against the risk associated with the Asia-Pacific equities during the COVID-19 pandemic albeit with a lower hedging effectiveness during the pandemic. Overall, including gold ETFs in an Asia-Pacific equity portfolio would provide both a valuable portfolio combination that could improve the risk-adjusted performance of the market in addition to serving as an effective hedge for equity-related risks.

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