Dependence of stock markets with gold and bonds under bullish and bearish market states

This paper examines the dependence of gold and benchmark bonds with ten stock markets, including five larger developed markets (e.g., the USA, the UK, Japan, Canada and Germany) and five Eurozone peripheral GIPSI countries' (Greece, Ireland, Portugal, Spain and Ireland) stock markets. We use a novel quantile-on-quantile (QQ) approach to construct the dependence estimates of the quantiles of gold and bonds with the quantiles of stock markets. The QQ approach, recently developed by Sim and Zhou (2015), captures the dependence between the entire distributions of financial assets and uncovers some nuance features of the relationship. The empirical findings primarily show that gold is a strong hedge and diversifier for the stock portfolio except when both markets are under stress. Furthermore, the flight to safety phenomenon is short-lived because national benchmark bonds exhibit a positive dependence with their respective countries' stock indices at various quantiles. In contrast to the existing literature, the QQ approach suggests that bonds act as safe havens for the stock portfolio, but gold does not. Our findings also suggest that the dependence between stock-gold and stock-bond pairs is not uniform, and this relationship is market state (e.g., bearish, mild bearish, optimistic or bullish) and country specific.