Empirical Analysis of Dependence Structure Between Assets: A Study of the Impact of Infation on Dependence Between Stock Portfolios and Gold

Sammanfattning: In this paper, we study the impact of inflation on the dependence and volatilities of gold and stock portfolios constructed by Fama and French. To model the dependence structure, we propose a copula probability model. As suggested by previous literature, we hypothesize that fluctuations in inflation directly influence the dependence of these assets. Further, we test different trading strategies to decide whether gold acts as a hedge or safe haven in a portfolio with stocks. Based on our results, we conclude that there are changes in dependence over time between the asset classes and that gold acts more as a hedge than safe haven over time. It is of particular interest to examine the impact of inflation in bad market environments, not least during the recent Covid-19 pandemic. This paper contributes to the research field by providing insights into the effects of fluctuating inflation on asset correlations, covering a long period. Moreover, we expect to provide investors with a deepening knowledge of how gold can act as an instrument for portfolio diversification.