Diversification Benefits of Precious Metal Markets : A Stochastic Spanning Approach

This paper investigates the diversification contribution of four main precious metals (i.e., gold, silver, platinum, and palladium) to a traditional portfolio of stocks, bonds, cash, and currencies, as well as the impact of the global financial crisis of 2008 on that contribution. We use a stochastic spanning methodology (Arvanitis et al. 2019) to test whether the traditional portfolio spans the portfolio augmented with all four precious metals in the G7 countries over three periods: before, during, and after the global financial crisis of 2008. In this study, we perform both in-sample and out-of-sample analyses of stochastic spanning tests. Our empirical results confirm the diversification benefits of precious metals for traditional assets in both spot and futures returns. These findings hold over three sub-periods of the global financial crisis of 2008. Notably, we find that precious metal futures significantly outperform precious metal spots in the aftermath of the 2008 crisis. Investors should therefore favor precious metal futures in post-crisis periods to improve their investment diversification