A Study on the Hedging Function of Gold in the Light of Economic Policy Uncertainty

This paper focuses on the empirical analysis of the closing price of gold, the SSE Index, and the China Economic Policy Uncertainty Index by means of a GARCH model to study the main characteristics of their movements. The series of gold closing price returns are analysed for linkage using the current mainstream VAR model, so as to analyse and compare the hedging function of gold. The article selects the closing price of gold, the SSE Index, and the China News-Based EPU from June 2005 to June 2019 as the sample series for the study. The background of the study and the theoretical knowledge of VAR and GARCH models are first introduced, and then, the GARCH family model and statistical analysis methods are used to derive the respective movements of the log returns of gold closing price, SSE index log returns, and China News-Based EPU log volatilities. The results show that the movements of the closing price of gold, the SSE Index, and the China News-Based EPU have the characteristics of financial assets in general, such as spikes and thick tails, agglomeration, and leverage effects. For the empirical study of the linkage between the three, this paper first considers only three variables, namely gold closing price, SSE index, and EPU. In order to investigate whether there is a co-integration relationship between them, a vector autoregressive model is established, followed by the corresponding impulse response analysis and variance decomposition. The analysis of the linkage between the closing price of gold, the SSE index, and the EPU concluded that changes in the EPU had a greater impact on the changes in the closing price of gold, while changes in the SSE index had a smaller impact on the changes in the closing price of gold. Finally, the conclusion of this article is some advice to investors on gold investment.