Hedging against risks associated with travel and tourism stocks during COVID ‐19 pandemic: The role of gold


The proliferation of papers examining the relationship between stock and precious metals, especially gold, is a testimony to the keen interest among researchers in understanding the hedging relationship between the two financial assets. Gold is particularly considered an important asset and effective diversifier by investors, academics and policymakers owing to some intrinsic characteristics it possesses (Conover, Jensen, Johnson, & Mercer, 2010; Henriksen, 2018; Wen & Cheng, 2018). It is seen as a financial/liquid asset which can easily be converted into cash and as a store of value as it helps hedge against inflation (see Arnold & Auer, 2015; Aye, Chang, & Gupta, 2016 for a review of the literature). Gold also possesses other values like acting as financial arbitrage, diversification benefit and hedging potential against dollar‐priced stocks and commodities as gold is also priced in dollars (see Baur & Lucey, 2010; Corbet, Larkin, & Lucey, 2020; Dee, Li, & Zheng, 2013, among others) as well as its safe haven property during tranquil and turbulent times (see Arfaoui & Rejeb, 2017; Baur & Lucey, 2010; Baur & McDermott, 2010; Capie, Mills, & Wood, 2005; Corbet et al., 2020; Gencer & Musoglu, 2014; Gokmenoglu & Fazlollahi, 2015; Lu, Wang, & Lai, 2014; Reboredo & Ugando, 2014; Reboredo & Ugolini, 2016; Sadorsky, 2014; Salisu, Ndako, & Oloko, 2019). 1 However, some thoughts have expressed caution, stating that investor behaviour can limit the hedging property of gold particularly when investment in the precious metal is done for speculative reasons (see Baur & Glover, 2012).

Theoretically, analysing the relationship between/among financial assets stems from the modern portfolio theory pioneered by Markowitz (1952, 1959) where the mean-variance (return-risk) framework is used to analyse portfolio choice and diversification decisions (see also, Adewuyi, Awodumi, & Abodunde, 2019). The justification for this is the importance of risk minimization and the belief that asset volatilities or market instabilities due to economic conditions such as business cycles and technological changes vary across assets over time. Capital asset pricing model (CAPM) is an improvement on the modern portfolio theory, it specifies a linear relationship between the expected rate of return on an asset and the risk on the asset. This theory is further expanded to accommodate risks in the international market which culminated in the development of international capital asset pricing model (ICAPM). This framework allows investors to move their investment from local assets like stock to international assets like gold during market turmoil (Arfaoui & Rejeb, 2017).

The analysis of the relationship between gold and stock returns is not new (see for example, Basher & Sadorsky, 2016; Baur & Lucey, 2010; Baur & McDermott, 2010; Beckmann, Berger, & Czudaj, 2015; Chkili, 2016; Gürgün & Ünalmış, 2014; Raza, Jawad, Shahzad, Kumar Tiwari, & Shahbaz, 2016; Shahzad, Raza, Balcilar, Ali, & Shahbaz, 2017) and most of the findings are in favour of the use of gold as a hedge or safe haven for stocks albeit with varying outcomes across countries and financial assets. For instance, Baur and Lucey (2010) find that gold serves as both hedge and safe haven for stocks in the United States and the United Kingdom but not for Germany. Baur and Mcdermott (2010) also report evidence of hedging and safe haven potential for Europe and United States but not for Australia, Canada, Japan and the BRIC countries. Meanwhile, only few studies have shown that gold is neither a hedge nor a safe haven. For instance, Charlot and Marimoutou (2014) establish that oil rather than gold or bond, hedges stock best in the emerging markets. Similar claim is reported in Basher and Sadorsky (2016), however Shahzad, Bouri, Roubaud, and Kristoufek (2020) find superior outcomes for gold when comparing the hedging and safe haven potential of bitcoin and gold for stocks of G7 countries.

From the foregoing, arguments in favour of the use of gold as a hedge or safe haven for stocks seem stronger than those against it. Given the current pandemic and the need for investors to diversify their investment, 2 this study seeks to examine whether investors in travel & tourism stocks can also draw from the potential of gold as a viable investment opportunity during crises particularly those associated with pandemics including COVID‐19 pandemic. Our interest in travel & tourism stocks finds its root in a number of reasons. One, in recent times, the tourism industry has witnessed a prominent increase all over the world. For example, the tourism receipts in 2018 reached 1,451 billion U.S. dollars vis‐à‐vis 2 billion U.S. dollars in 1950, and international tourist arrivals increased to 1,401 million in 2018 vis‐à‐vis 25 million in 1950 (UNWTO, 2020; Salisu & Akanni, 2020). Two, the outbreak of coronavirus which has triggered an economic crisis has seen the travel & tourism sector become its most affected victim with about 70% loss in revenue (Salisu & Vo, 2020; Statista, 2020). The aftermath of such fear is always a severe demand shock for services such as tourism, hospitality, mass transportation and logistics (Page, Yeoman, Munro, Connell, & Walker, 2006). It tends to reduce the competitiveness of affected countries and by extension may cause huge declines in tourist receipts (Kuo, Chen, Tseng, Ju, & Huang, 2008).

In terms of methodology, we employ a bivariate generalized autoregressive conditional heteroscedastic (GARCH) based on the preliminary tests as well as its ability to capture time‐variation in the analysis of hedging relationship between gold and travel & tourism stocks. 3 In addition, the considered methodology tends to offer superior hedging effectiveness performance relative to other competing models as Vector Autoregressive model and its variants (see Lee, Chiou, Wu, & Chen, 2005; Lypny & Powalla, 1998; Yang & Lai, 2009). Finally, the use of this approach to compute optimal weight ratios and optimal hedging ratios is well documented in the empirical literature (see Arouri, Jouini, & Nguyen, 2011; Arouri & Nguyen, 2010; Salisu et al., 2020; Salisu & Mobolaji, 2013; Salisu & Oloko, 2015a, 2015b).

Following this background, we offer some preliminary analyses in Section 2 to determine the appropriate model for analyses; in Section 3, we evaluate the relative hedging effectiveness of gold for travel & tourism stocks to minimize the risks due to the pandemic while Section 4 concludes the paper.

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