The Asymmetric Effect of Market Uncertainty on Safe havens, Inverted Asymmetry and Contagion During COVID-19 Periods

Abstract

This study examines the asymmetric effect of stock market uncertainty on the safe-haven status, asymmetric volatility, and contagion/flight characteristics of gold, bonds, exchange rates, crude oil, and Bitcoin during the COVID-19 pandemic in the US, Eurozone and Japan. Utilizing a quantile-based double-threshold GJR-GARCH model, we analyze how increased stock market uncertainty, indicated by high implied volatility, impacts the behavior of these assets. Our findings reveal that gold, bonds, and exchange rates exhibit safe-haven properties and inverted asymmetric volatility (where volatility spikes during market upswings due to liquidity strains, contrasting traditional leverage effects) during periods of high stock market uncertainty. In this phenomenon, volatility spikes during market upswings due to liquidity strains and surging demand as investors rush toward these assets, contrasting with traditional leverage effects where volatility rises after negative shocks. Notably, investors flee stocks toward gold and bonds during periods of high uncertainty, while contagion emerges during periods of low uncertainty due to shared investor sentiment driving correlated movements. These discoveries challenge conventional views of uniform co-movements during crises and have significant policy implications for financial regulators, policymakers, and investors alike. By understanding how safe-haven assets respond to varying levels of stock market uncertainty, policymakers can design policies to maintain market stability and prevent systemic risks. For example, measures to ensure liquidity and stability in safe-haven markets during periods of heightened uncertainty could mitigate adverse market reactions. Similarly, investors can optimize their portfolios by strategically allocating assets based on prevailing market conditions, while financial regulators can anticipate and mitigate potential market stresses. JEL Classification: G01, G11.