Linkages among stock markets, precious metals and hedge funds: An empirical investigation of the Asia-Pacific region : A thesis submitted in partial fulfilment of the requirements for the Degree of Doctor of Philosophy at Lincoln University

Abstract

This study examines the linkages among the stock market, precious metals and hedge funds in the 12 countries of Asia-Pacific region. Using weekly data from 1997 to 2018, this study investigates the existence of price linkages, cointegration and the relationships between the markets. The data divided into sub-samples comprising times representing the 1997 Asian financial crisis, the 2007-2008 Global financial crisis and the 2010 Eurozone crisis to obtain an in-depth understanding of the impact on the linkages among the markets during three significant financial crises. Both long-run and short-run associations between the variables are investigated. To do this, the Engle and Granger two step, Johansen cointegration techniques, Vector Error Correction Modelling and Granger causality tests are used with the main objective of examining the price co-movement between the variables. The study also uses bivariate and trivariate econometric techniques to provide sufficient evidence regarding the linkages among the markets and the impact of the international stock market by introducing another variable, i.e., the US Dow Jones. To investigate the nature of the volatility spillover among the markets, we employed GARCH and EGARCH modelling. The main findings show that stock prices and precious metals seem to be independent and not cointegrated. Stock market prices and precious metals prices did not show any volatility spillover effect. Overall, there is no evidence of these two variables moving together either in the long- or short-run. The results show evidence of an asymmetric spillover effect from stock returns to precious metals market prices in some countries under analysis, with no evidence of a causal relationship running from precious metals towards stock market prices. In the volatility analysis, there is some commonality regarding the behaviour of the variables, with a unidirectional spillover effect between the markets. The analysis of the stock markets and hedge funds shows that hedge fund returns do not seem to be affected by movements in stock markets; the findings show no volatility spillover effect among stock market returns and hedge funds that suggests that these two markets are unrelated. This study also expanded the literature on the hedge funds industry that is considered an independent market where no other market significantly affects hedge fund performance. The reason is that hedge funds are actively managed by fund managers based on performance incentives. This property of hedge funds forces the managers to modify their portfolio diversification as the market shows volatility or vulnerability. With regard to the effects of hedge funds on other asset classes, there is an opportunity for future research to expand the qualitative analysis. This study investigates the price stability properties of precious metals during the 1997 Asian Financial Crisis, 2007-2008 Global Financial Crisis and 2010 Eurozone Crisis. To analyse the interaction between precious metals we use the ICSS algorithm along with GARCH model to evaluate how the number of rapid changes in volatility of precious metals has been reduced. The results suggest gold is the most stable of the precious metals. However, silver, platinum and palladium showed positive price correlation when the US Dow Jones market was unstable. These results imply that: 1) the correlation among stocks in Asia Pacific countries has little to no significant impact on the price movement of precious metals, but the US Dow Jones has an influence on precious metals markets except gold, which means investors can reap this benefit from diversification; 2) like precious metals, hedge funds are completely independent from the stock market price volatility and can be a stable investment avenue for diversification; and 3) investors in the Asia-Pacific region can systematically increase their portfolio returns by going short with the gold investments with low price co-movement and long on silver, platinum and palladium with high co-movement with stock prices.