Does Gold Serve as a Hedge for the Stock Market in China? Evidence from a Time-Frequency Analysis

This paper uses a wavelet approach to examine the relationship between gold prices and the Chinese stock market over the past quarter-century. Our empirical study with weekly data shows that gold cannot be used as a short-term hedging tool in China in the full sample period, but it can be used as a long-term hedging tool in the sample period after 2005, concurrent with changes in Chinese government policy. This conclusion also emerges when weekly data are replaced by monthly or daily data. However, similar changes in the long-term hedging ability of gold are not observed in the UK and the US. Thus, this change in the ability of gold to serve as a hedge in China can probably be attributed to shifts in some important market policies, such as the reform in nontradable shares in the Chinese capital market and the exchange rate reform in 2005.