Abstract

We analyzed the conditional correlation between the returns of five assets (S&P 500, investment grade bond, high-yield bond, crude oil and gold). The results obtained with the AGDCC model lead to several conclusions. The correlations between the assets retained are feeble during stable periods. In periods of financial crisis with sustained economic growth, adding gold, crude oil, high-yield bonds and investment-grade bonds in a portfolio can improve the benefit of this portfolio. However, investors should adjust their portfolio when concerns about the economic growth appear as crude oil is negatively correlated with the returns of the S&P 500 and the high-yield bond during crisis periods, but it is positively correlated with those assets’ returns when the crisis is coupled with economic recession. Regarding the high yield bond, it losses less value than stock index during bear market and it appreciates as much as stock index during bull market. As for the gold, it is a strong safe haven during periods characterized by fears of recession, concerns regarding the credit markets, target rate cuts, as well as uncertainties regarding inflation rate. Thus, gold was not a safe haven during the Asian and the Russian crises, whereas it was a weak safe haven during the dot-com crisis and a strong safe haven during the subprime crisis. During these crises, due to the "flight-to-quality" gold value appreciated strongly compared to the other assets retained. Furthermore, with the aggravation of the economic and financial situation the negative impacts of the subprime crisis have spread from stock market and high-yield bonds to other financial markets (contagion), except to the gold market.

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