Gold and capital market in Indonesia: A preview on strategy of hedging and diversification

Title: Gold and capital market in Indonesia: A preview on strategy of hedging and diversification
Issue: Vol. 12, No 2, 2019
Published date: 05-2019 (print) / 05-2019 (online)
Journal: Journal of International Studies
ISSN: 2071-8330, eISSN: 2306-3483
Authors: Robiyanto Robiyanto
Faculty of Economics and Business, Satya Wacana Christian University, Indonesia

Didik Hadiyatno
Faculty of Economics, University of Balikpapan, Indonesia

Sudjinan Sudjinan
Faculty of Economics, University of Balikpapan, Indonesia

Rihfenti Ernayani
Faculty of Economics, University of Balikpapan, Indonesia
Keywords: DCC-GARCH, gold, Jakarta Islamic Index (JII), Indonesian capital market
DOI: 10.14254/2071-8330.2019/12-2/7
Language: English
Pages: 117-128 (12)
JEL classification: G11
This research received no specific grant from any funding agency in the public, commercial, or not-for-profit sectors.

This study examines the establishment of a portfolio among sharia stocks represented by the Jakarta Islamic Index (JII) with gold (gold futures contracts). Gold price used in this research was the gold price in the international market which was in USD denomination and also converted into Rupiah (IDR), by considering commodity futures instruments in Indonesia using fixed rate or floating rate option. The data analysis technique used in this research was the dynamic portfolio formulation by using Dynamic Conditional Correlation – Generalized Autoregressive Conditional Heteroscedasticity (DCC-GARCH), so that the portfolio produced was an active portfolio and it could change its composition over time. The results of this study indicate that gold is able to provide hedging effectiveness as well as to reduce the volatility of sharia stocks included in the JII in the Indonesia Stock Exchange. This research is also able to prove that including gold instruments into a sharia-based stock portfolio can improve portfolio performance. Unfortunately, such strategies could not be counted as a sharia-based investment strategy, although stocks used in this portfolios were sharia compliant since futures contract was not considered as a sharia compliant instrument as it can be considered as haram (prohibited) in Islam.


1. Arouri, M. E. H., Lahiani, A., & Nguyen, D. K. (2014). World Gold Proces and Stock Return in China: Insights for Hedging and Diversification Strategies. Working Paper.

2. Baur, D. G., & Lucey, B. M. (2010). Is Gold a Hedge or a Safe Haven? An Analysis of Stocks, Bonds and Gold. The Financial Review, 45, 217-229. doi:

3. Baur, D. G., & McDermott, T. K. (2009). Is Gold a Safe Haven?: International Evidence. Institute for International Integration Studies (IIIS) Discussion Paper(310).

4. Baur, D. G., & McDermott, T. K. J. (2012). Safe Haven Assets and Investor Behaviour under Uncertainty. Working Paper. UTS, School of Business, Finance Discipline Group. Sydney.

5. Bollerslev, T. (1986). Generalized autoregressive conditional heteroscedasticity. Journal of Econometrics, 31, 307-327. doi:

6. Chua, J. H., Sick, G., & Woodward, R. S. (1990). Diversifying with Gold Stocks. Financial Analysts Journal, 46(4), 76-79. doi:

7. Ciner, C., Gurdgiev, C., & Lucey, B. M. (2012). Hedges and Safe Havens – An Examination of Stocks, Bonds, Oil, Gold and the Dollar Working Paper

8. Cvitanic, J., Lazrak, A., & Wang, T. (2007). Implications of Sharpe Ratio as a Performance Measure in Multi-Period Settings Working Paper

9. Engle, R. F. (2002). Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models. Journal of Business & Economic Statistics, 20(3), 339-350. doi:

10. Faubert, V. (2012). Is Gold Still a Safe Haven? Tresor-Economics, Ministere de L'Economie Des Finances et de L'Industrie, April 2012(101).

11. FSA. (2018). Capital Market Statistik 2017. In F. S. A. Indonesia (Ed.).

12. Herbst, A. (1983). Gold versus U.S. Common Stocks: Some Evidence on Inflation Hedge Performance and Cyclical Behavior. Financial Analysts Journal, 66-74.

13. Hillier, D., Draper, P., & Faff, R. (2006). Do Precious Metals Shine? An Investment Perspective. Financial Analysts Journal, 62(3/4), 98-106. doi:

14. Hoang, T.-H.-V., Lean, H. H., & Wong, W.-K. (2015). Is Gold Good for Portfolio Diversification? A Stochastic Dominance Analysis of the Paris Stock Exchange. International Review of Financial Analysis. doi:

15. Hood, M., & Malik, F. (2013). Is Gold the Best Hedge and a Safe Haven Under Changing Stock Market Volatility. Review of Financial Economic, 22(2), 47-52. doi:

16. Hussin, M. Y. M., Muhammad, F., Razak, A. A., Tha, G. P., & Marwan, N. (2013). The Link between Gold Price, Oil Price and Islamic Stock Market: Experience from Malaysia. Journal of Studies in Social Sciences, 4(2), 161-182.

17. Ibrahim, M. H. (2010). Financial market risk and gold investment in an emerging market: the case of Malaysia. Paper presented at the PERKEM V.

18. Ibrahim, M. H. (2012). Financial Risk Market and Gold Investment in an Emerging Market: The Case of Malaysia. International Journal of Islamic and Middle Eastern Finance and Management Research News, 5(1), 25-34. doi:

19. Ibrahim, M. H., & Baharom, A. H. (2012). The Role of Gold in Financial Market: A Malaysian Perspective. Economic Computation & Economic Cybernetics Studies & Research.

20. Jensen, M. C. (1967). The performance of mutual funds in the period 1945–1964. Journal of Finance, 23(2), 389-416. doi:

21. Kidd, D. (2011). The Sharpe Ratio and the Information Ratio. Investment Performance Measurement Feature Articles, 1, 1-4.

22. Kroner, K. F., & Ng, V. K. (1998). Modelling Asymmetric Comovements of Assets Returns. Review of Financial Studies, 11(4), 817-844.

23. Kroner, K. F., & Sultan, J. (1993). Time-Varying Distributions and Dynamic Hedging with Foreign Currency Futures. Journal of Financial and Quantitative Analysis, 28(4), 535-551.

24. Ku, Y.-H. H., Chen, H.-C., & Chen, K.-H. (2007). On the Application of the Dynamic Conditional Correlation Model in Estimating Optimal Time-varying Hedge Ratios. Applied Economics Letters, 14(7), 503-509. doi:

25. Kumar, D. (2014). Return and Volatility Transmission Between Gold and Stock Sectors: Application of Portfolio Management and Hedging Effectiveness. IIMB Management Review, 26(1), 5-16. doi:

26. Ratner, M., & Klein, S. (2008). The portfolio implications of gold investment. Journal of Investing, 17(1), 77-87. doi:

27. Robiyanto, R. (2017). Performance evaluation and risk aversion rate for several stock indices in Indonesia Stock Exchange. Jurnal Manajemen dan Kewirausahaan, 19(1), 60-64. doi:

28. Robiyanto, R. (2018a). Indonesian Stock Market’s Dynamic Integration with Asian Stock Markets and World Stock Markets. Jurnal Pengurusan, 52, 181-192. doi:

29. Robiyanto, R. (2018b). Testing of the Gold's Role as a Safe Haven and Hedge for Sharia Stocks in Indonesia. Al-Iqtishad: Jurnal Ilmu Ekonomi Syariah, 10(2), 255-266. doi:

30. Robiyanto, R., Wahyudi, S., & Pangestuti, I. R. D. (2017a). Testing Commodities as Safe Haven and Hedging Instrument on ASEAN's Five Stock Markets Jurnal Ekonomi Kuantitatif Terapan, 10(2), 231-238. doi:

31. Robiyanto, R., Wahyudi, S., & Pangestuti, I. R. D. (2017b). The volatility–variability hypotheses testing and hedging effectiveness of precious metals for the Indonesian and Malaysian capital markets. Gadjah Mada International Journal of Business, 19(2),

32. Sharpe, W. F. (1966). Mutual Fund Performance. Journal of Business, 39(1), 119-138.

33. Sortino, F. A., & Price, L. N. (1994). Performance Measurement in a Downside Risk Framework. Journal of Investing, 3(3), 59-64. doi:

34. Treynor, J. L. (1965). How to Rate Management of Investment Funds. Harvard Business Review, 43(1), 63-75.

35. Wahyudi, S., Nofendi, D., Robiyanto, R., & Hersugondo, H. (2018). Factors affecting return on deposit (ROD) of sharia banks in Indonesia Business: Theory and Practice, 19, 166-176. doi:

36. Zulkafli, A. H., Ahmad, Z., & M., E. E. (2017). The Performance of Socially Responsible Investments in Indonesia: A Study of the Sri Kehati Index (SKI). Gadjah Mada International Journal of Business, 19(1), 59-76. doi: