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Portfolio diversification with virtual currency: Evidence from bitcoin

Author

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  • Guesmi, Khaled
  • Saadi, Samir
  • Abid, Ilyes
  • Ftiti, Zied

Abstract

The paper investigates the proprieties of Bitcoin in the financial markets. Specifically, we explore the conditional cross effects and volatility spillover between Bitcoin and financial indicators using different multivariate GARCH specifications. The nature of interaction between Bitcoin and financial variables and their transmission mechanisms are taken into account when analyzing the diversification and hedging effectiveness across gold asset and stock market. Our findings suggest that all models confirm the significant returns and volatility spillovers. More importantly, we find that VARMA (1,1)-DCC-GJR-GARCH is the best-fit model for modeling the joint dynamics of a variety of financial assets. We also show that a short position in the Bitcoin market allows hedging the risk investment for all different financial assets. Finally, hedging strategies involving gold, oil, equities and Bitcoin reduce considerably the portfolio's risk, as compared to the risk of the portfolio made up of gold, oil and equities only.

Suggested Citation

  • Guesmi, Khaled & Saadi, Samir & Abid, Ilyes & Ftiti, Zied, 2019. "Portfolio diversification with virtual currency: Evidence from bitcoin," International Review of Financial Analysis, Elsevier, vol. 63(C), pages 431-437.
    • Handle: RePEc:eee:finana:v:63:y:2019:i:c:p:431-437
    DOI: 10.1016/j.irfa.2018.03.004
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    References listed on IDEAS

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    More about this item

    Keywords

    Virtual currencies; Bitcoin; GARCH models; Hedging; Diversification;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • F3 - International Economics - - International Finance
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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