The determinants of a simultaneous crash in gold and stock markets: An ordered logit approach

Abstract

In this study, we identify the determinants of a simultaneous crash in gold and stock markets by employing an ordered logit model. We find that a default spread, among the various financial risk indicators, is a valid determinant and that changes in investors' beliefs, their uncertainties, and surprise changes in these uncertainties about gold and stock markets contain useful information for explaining the occurrence of a simultaneous crash in the two markets. Further, we recognize that the effect of some covariates on crash probability is state-dependent. In addition to these empirical results, a notable finding is that the occurrence of a crash in one market on a previous day does not raise the probability of the occurrence of a crash in another market the next day, implying that a joint crash occurs abruptly and not in a chain reaction. This finding reveals that diversification to gold is still beneficial to investors.