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Could stock hedge Bitcoin risk(s) and vice versa?

Author

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  • David Iheke Okorie

    (Wang Yanan Institute for Studies in Economics (WISE), Xiamen University)

Abstract

This paper is saddled with the task of investigating the Bitcoin market behavior in the presence of a government risk. This is because both the institutional and retail investors’ interests in the Bitcoin market are growing rapidly. Conversely, the seemingly unregulated nature of this market is a serious concern to most economies and results to the placement of ban on Initial Coin Offering (ICO) in some economies by the government. Daily series of return and volume within the window of the ICO ban in China was used for the Bitcoin market and S&P500 stock market to examine the effect of a government risk in the Bitcoin market and possible hedging capabilities. Empirical results show that the ban dampened Bitcoin returns and the returns from each market can predict the other. The Exogenous Dynamic Conditional Correlation (Exo-DCC) model result suggests that, yes! the S&P500 stocks are capable of hedging Bitcoin risk, while Bitcoin can also hedge S&P500 stocks’ risks and vice versa. The Exogenous BEKK (Exo-BEKK) model result shows evidence of bidirectional volatility spill over between the two markets studied. In practice, investors (institutions and retailers) can comfortably form a robust investment portfolio with (at least) these two assets and develop a hedging strategy, such that the impacts of risks on the portfolio’s returns are safely hedged.

Suggested Citation

  • David Iheke Okorie, 2020. "Could stock hedge Bitcoin risk(s) and vice versa?," Digital Finance, Springer, vol. 2(1), pages 117-136, September.
    • Handle: RePEc:spr:digfin:v:2:y:2020:i:1:d:10.1007_s42521-019-00011-0
    DOI: 10.1007/s42521-019-00011-0
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    Citations

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    Cited by:

    1. Okorie, David Iheke & Lin, Boqiang, 2022. "Givers never lack: Nigerian oil & gas asymmetric network analyses," Energy Economics, Elsevier, vol. 108(C).
    2. David Iheke Okorie & Boqiang Lin, 2022. "Crude oil market and Nigerian stocks: An asymmetric information spillover approach," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(4), pages 4002-4017, October.
    3. Ibhagui, Oyakhilome, 2021. "Stock market and deviations from covered interest parity," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 74(C).
    4. Okorie, David Iheke & Lin, Boqiang, 2023. "Cryptocurrency spectrum and 2020 pandemic: Contagion analysis," International Review of Economics & Finance, Elsevier, vol. 84(C), pages 29-38.
    5. Okorie, David Iheke & Lin, Boqiang, 2021. "Adaptive market hypothesis: The story of the stock markets and COVID-19 pandemic," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    6. David I. Okorie, 2021. "A network analysis of electricity demand and the cryptocurrency markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(2), pages 3093-3108, April.
    7. Raifu, Isiaka Akande & Ogbonna, Ahamuefula E, 2021. "Safe-haven Effectiveness of Cryptocurrency: Evidence from Stock Markets of COVID-19 worst-hit African Countries," MPRA Paper 113139, University Library of Munich, Germany.
    8. Yongzhi Gong & Xiaofei Tang & En-Chung Chang, 2023. "Group norms and policy norms trigger different autonomous motivations for Chinese investors in cryptocurrency investment," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-10, December.

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    More about this item

    Keywords

    Risk management; Hedging; Return; Volatility; Bitcoin; Stock;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • R53 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Public Facility Location Analysis; Public Investment and Capital Stock

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