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Volatility forecasting, downside risk, and diversification benefits of Bitcoin and oil and international commodity markets: A comparative analysis with yellow metal

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  • Al-Yahyaee, Khamis Hamed
  • Mensi, Walid
  • Al-Jarrah, Idries Mohammad Wanas
  • Hamdi, Atef
  • Kang, Sang Hoon

Abstract

This study examines the diversification and hedging properties of Bitcoin (BTC) and gold assets for oil and S&P GSCI investors. We model and forecast the volatility performance of the pairs BTC–oil, gold–oil, BTC–S&P GSCI, and gold–GSCI using five bivariate DCC-GARCH family models, two popular forecasting measures (MSE and MAE), the Diebold and Mariano (1995) test, and different risk measures (value-at-risk, expected shortfall, semivariance, and regret) for different portfolios. We find that BTC and gold provide diversification benefits for oil and S&P GSCI. Moreover, by comparing the fitting and forecast performances of the five GARCH models, we find that the standard GARCH model is the best for the gold–oil and BTC–S&P GSCI pairs, while the HYGARCH model is the best for the BTC–oil and gold–S&P GSCI pairs regardless of the time horizon. Finally, we find strong evidence of hedging effectiveness and downside risk reductions, confirming the importance of BTC and gold in oil and S&P GSCI portfolio management.

Suggested Citation

  • Al-Yahyaee, Khamis Hamed & Mensi, Walid & Al-Jarrah, Idries Mohammad Wanas & Hamdi, Atef & Kang, Sang Hoon, 2019. "Volatility forecasting, downside risk, and diversification benefits of Bitcoin and oil and international commodity markets: A comparative analysis with yellow metal," The North American Journal of Economics and Finance, Elsevier, vol. 49(C), pages 104-120.
    • Handle: RePEc:eee:ecofin:v:49:y:2019:i:c:p:104-120
    DOI: 10.1016/j.najef.2019.04.001
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    4. Alsuhaibani, Waleed & Houmes, Robert & Wang, Daphne, 2023. "The evolution of financial reporting quality for companies listed on the Tadawul Stock Exchange in Saudi Arabia: New emerging markets' evidence," Emerging Markets Review, Elsevier, vol. 55(C).
    5. Nikolaos A. Kyriazis, 2021. "A Survey on Volatility Fluctuations in the Decentralized Cryptocurrency Financial Assets," JRFM, MDPI, vol. 14(7), pages 1-46, June.
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    7. Papadamou, Stephanos & Kyriazis, Nikolaos A. & Tzeremes, Panayiotis G., 2021. "Non-linear causal linkages of EPU and gold with major cryptocurrencies during bull and bear markets," The North American Journal of Economics and Finance, Elsevier, vol. 56(C).
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    More about this item

    Keywords

    Bitcoin; Commodity markets; Forecasting; Downside risk; Multivariate GARCH models;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices

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