In gold and Franc we trust? Rethinking safe havens in Europe

What is it about?

Given the critical need for portfolio diversification, we analyze the interdependencies of gold and the Swiss Franc with European stock markets. Using the R2 decomposed connectedness approach and an extensive dataset spanning May 1, 2004, to May 31, 2025, we investigate the dynamic interactions separately within developed and emerging markets. Our findings reveal that total connectedness is stronger within developed markets and prone to several extraneous disruptions. While the Swiss Franc imports shocks from developed markets but acts as a volatility exporter in emerging markets, gold consistently demonstrates shock-absorbing behavior in both domains. We further assess their effectiveness in risk mitigation by using bivariate and multivariate portfolio strategies. The Swiss Franc offers considerable hedging advantages for developed stock portfolios, especially during financial turmoil, though these attributes wane in emerging markets. In contrast, gold is not an effective hedging tool in neither market type. The multivariate hedging strategy generates suboptimal risk reduction in emerging economies compared to developed ones and, under specific conditions, proves futile. Furthermore, bivariate portfolio analysis shows that gold provides superior risk-adjusted returns in both settings and under all market regimes. Although the Swiss Franc's inclusion often reduces Sharpe ratios, it emerges as a more defensive asset for downside protection during crises. Notably, the multivariate portfolio methodology is crucial for attaining higher Sharpe ratios in emerging markets, even though it doesn't improve risk-adjusted performance in developed markets. These findings become essential for investors and policymakers managing the complexities of modern financial markets.

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Why is it important?

Three original contributions to the existing literature are provided in this paper. As far as the authors are aware, the first contribution of the paper is the detailed examination of the intricate interactions among gold, the Swiss Franc and a wide range of developed and emerging European stock markets. The motivation for encompassing European continent regions in our experiment lies in the prominent role which gold and the Swiss Franc play as two of the most popular assets utilized for diversification in European stock portfolios.With a distinct focus on each market type, this study allows for a more in-depth investigation of risk transmission than simply observing spillovers within a a unified framework for developed and emerging stock markets (Balli et al., 2015; Bhuyan et al., 2016; Yavas & Dedi, 2016). The second significant contribution is the introduction of gold and the Swiss Franc in a multivariate hedging framework, as well as the application of the novel minimum R2 decomposed connectedness portfolio, to ascertain their utility in risk diminution and risk-adjusted augmentation. Consequently, this work enriches the portfolio management literature by demonstrating how gold and the Swiss Franc can be used to manage downside risk and optimize investment returns. The exhaustive analysis of gold and the Swiss Franc safe haven characteristics constitute the third contribution of the study. The behavioral patterns of these safe haven assets are scrutinized rigorously by focusing on their performance across fiveve distinct crisis episodes.

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