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Is the cryptocurrency market a hedge against stock market risk? A Wavelet and GARCH approach

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  • Susovon Jana
  • Tarak N. Sahu

Abstract

This study analyses six major cryptocurrencies and four global stock markets to explore the role of cryptocurrencies as a hedge, safe haven, and diversifier in stock markets. The study employs ADCC‐GARCH and Wavelet Coherence Technique, using daily data from 4 January 2017 to 28 February 2023. The study has found that stock returns and unstable cryptocurrency returns have high volatility persistence in the long run. Besides, while unstable digital currencies (Bitcoin, Ethereum, Binance Coin, and Dogecoin) serve as a hedge during stable economic periods, they have not been a hedge during economic turmoil in the stock markets. Conversely, stablecoins (Tether and USD Coin) have been shown to have acted as a hedge during normal economic times and have offered a safe haven during economic downturns. Except for Tether, all cryptocurrencies' diversification capacity is time‐varying. In stable economic conditions, they serve as diversifiers, but during turmoil, they do not. However, Tether serves as a diversifier regardless of the financial situation. Finally, the present investigation is expected to offer crucial information on hedge, safe haven and diversification for quasi‐investors.

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  • Susovon Jana & Tarak N. Sahu, 2023. "Is the cryptocurrency market a hedge against stock market risk? A Wavelet and GARCH approach," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 52(3), November.
    • Handle: RePEc:bla:ecnote:v:52:y:2023:i:3:n:e12227
    DOI: 10.1111/ecno.12227
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    1. Susovon Jana & Tarak Nath Sahu, 2024. "Identifying Cryptocurrencies as Diversifying Assets and Safe Haven in the Indian Stock Market," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 31(4), pages 925-944, December.
    2. Huy Pham & Trang Ngoc Doan Tran & Ngoc Thi Thanh Nguyen & Khoa Dang Duong, 2024. "The reversal in the cryptocurrency market before and during the Covid-19 pandemic: Does investor attention matter?," PLOS ONE, Public Library of Science, vol. 19(11), pages 1-23, November.

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