Dynamic correlations and portfolio implications across stock and commodity markets before and during the COVID-19 era: A key role of gold

Novel Coronavirus (COVID-19) has affected stock markets around the globe, adding serious challenges to asset allocations and hedging strategies. This investigation analyses the dynamic correlations and portfolio implications among the S&P 500 index and various commodities (gold, WTI crude oil, Brent oil, beverages, and wheat) before and during the COVID-19 era. Using multivariate asymmetric GARCH models, the results show weak correlations during the standard period. However, the correlations intensify and become more complicated during the COVID-19 era, especially between gold and S&P 500. Similarly, bidirectional return and volatility spillovers across stock-commodity markets are more pronounced during the COVID-19 outbreak. Analysis involving the optimal portfolio weights and time-varying hedge ratios indicates that a $1long position in the S&P 500 can be hedged for 15 cents in crude oil during the standard period and for 33 cents in gold during the COVID-19 era. A portfolio of S&P 500 – beverages displays the highest VaR, while a portfolio of S&P 500 – gold displays the lowest VaR, especially during the COVID-19 era. This finding suggests that gold offers better portfolio diversification benefits and downside risk reductions, which are useful in determining strategies for portfolio investors during the COVID-19 outbreak.