Financial markets all over the world have taken a tremendous hit from Covid. At the beginning of this current crisis, the extreme market scenarios imagined by the global regulators all over the world have been thrown to the sidelines most of the time by investors' market reaction.
All over the world multiple time the market circuit breaker has to come into effect which can only be measurable with the Global Financial crisis (GFC). The investors have lost much of their portfolio all over the world including Asia within a blink of an eye especially at the beggining of the crisis. Even the markets are coming back to normal in a long shot, still, it begs a question: what is safe in this environment?
Our knowledge of the GFC is certainly not the worst the current COVID pandemic has led to and this is due to the new normal. We have to understand and recalibrate our definition of the safe asset in this regard. So in the future, we may have to prepare for even the worse. In this regard, in a recent article on Finance Research Letter, one of the leading finance journals of the world, Kinateder, Campbell, and Choudhury (2021) investigate within three distinct financial asset groups, i.e. major sovereign bond indices, major commodity indices, and exchange rates against the USD, in the context of both GFC and COVID.
The findings reveal a substantial degradation of co-relationship in COVID-19 contrasted to the GFC. However, the exchange rates correlation is quite balanced during both phases. The outcomes indicate that the conventional safe assets, gold and in particular U.S. sovereign bonds, might still be a sounder option within their asset class given the decrease of the correlation along with the UK and German sovereign bonds.
The outcomes of this study have major consequences for investment decision-making, favouring fast flight to quality or liquidity to the safe havens. In the future, in the wake of substantial spikes in the VIX (Chicago Board Options Exchange's volatility index) could prepare the world to better inhibit and handle stress events by using proportionate flight to quality.
Highlights of the study are as follows for institutional investors: (i) There is a significant degradation of co-relationship within the asset classes in Covid-19 compared to the GFC; (ii) The exchange rates and sovereign bond market correlations are quite stable during the periods; and (iii) U.S., UK, and German sovereign bonds as well as gold are a safe haven for investors during both investigated crises.
Harald Kinateder is with School of Business, University of Passau Innstrasse, Germany. harald.kinateder@uni-passau.de. Tonmoy Choudhury is with School of Business and law, Edith Cowan University, Australia, t.choudhury@ecu.edu.au.