Brian M. Lucey suggest that gold is a hedge and safe heaven, he has a lot of work on this topic. Now, Perry Sadorsky (well know name in oil related topics, see Basher, S. A., & Sadorsky, P. (2016). Hedging emerging market stock prices with oil, gold, VIX, and bonds: A comparison between DCC, ADCC and GO-GARCH. Energy Economics, 54, 235-247) recently show that oil is better hedge than gold and even better than VIX, isn't it counter intuitive? Or is there some problem with their framework?
VIX is the volatility index and has the highest negative correlation with S&P 500 so is it logical to hedge S&P 500 investment by VIX?
Unfortunately, hedging by VIX is impossible. VIX is not a traded instrument. If you want to "hedge by VIX", you would need to use VIX futures, or VIX exchange traded products, and both have negative excess returns. In other words, hedging by instruments that resemble VIX is very costly. I did not study how suitable is oil for hedging, but due to above mentioned issues I would easily believe that hedging by oil works better than hedging by VIX instruments.
Sir, thanks for the answer, got your point on the VIX. Sir, what is the logic behind if one researcher say that Gold is a good hedge as it has weak or no correlation with stocks e.g. "A hedge is defined as an asset that is uncorrelated or negatively correlated with
another asset or portfolio on average" (https://brianmlucey.files.wordpress.com/2011/05/gold_safehavenorhedge_fr.pdf), while the other (Basher, S. A., & Sadorsky, P. (2016). Hedging emerging market stock prices with oil, gold, VIX, and bonds: A comparison between DCC, ADCC and GO-GARCH. Energy Economics, 54, 235-247) suggest that hedge is an asset that has high positive correlation with the stocks.
Just because oil have high correlation (conditional or unconditional) with stocks in comparison with gold, vix etc so we can hedge stocks by taking a short position in oil?
Yes, exactly. As long as there is strong correlation (whether positive or negative), it can be used for hedging. Btw, agree with you that those definitions are confusing.
Sir, if it's as you said that we use an asset as hedge given high positive/negative correlation through short/long positions. It mean one can hedge the credit risk (i assume the investment in credit default swaps) of metals industry (a major concern these days - http://www.gtreview.com/news/europe/high-credit-risk-for-eu-metals/) by simply taking a short position in previous metals (gold, copper etc)?
E.g. if i have one dollar investment in mining and metals industry's CDS contracts, i can hedge the risk of CDS decline by taking a long position in precious metals (may be using futures). Both have a moderate to high negative correlation.
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