The Price of Shelter - Downside Risk Reduction with Precious Metals
34 Pages Posted: 5 Apr 2016 Last revised: 20 Feb 2020
Date Written: March 31, 2016
Investor aversion to extreme losses may motivate them to seek out investments perceived to function as a safe haven during times of crisis. In this study, we consider the potential for precious metals to mitigate downside risk when combined with equities, and evaluate the impact on portfolio risk-adjusted returns. Each of gold, silver and platinum are found to contribute to downside risk reduction at short horizons, but diversification into silver and platinum may result in increased long horizon portfolio risk. The price of sheltering an equity portfolio from downside risk is a relative reduction in portfolio risk-adjusted returns. Variance and kurtosis properties of precious metals are identified as marginal contributors to downside risk reduction. Futures markets on precious metals are also shown to present an interesting and viable diversification alternative to physical metals.
Keywords: Downside Risk, Precious Metals, Horizon, Safe Haven, Value-at-Risk
JEL Classification: G00, G10, G11, G12
Suggested Citation: Suggested Citation