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Is Bitcoin a hedge? How extreme volatility can destroy the hedge property

Author

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  • Baur, Dirk G.
  • Hoang, Lai T.
  • Hossain, Md Zakir

Abstract

A large literature tests whether Bitcoin can hedge portfolio risk, i.e. reduce the risk if added to a portfolio. Intuitively, given the extreme volatility and thus risk of Bitcoin and cryptocurrencies, the idea that Bitcoin is a hedge may be puzzling. Indeed, we show that for extreme levels of volatility, Bitcoin does not reduce the risk if added to a benchmark equity portfolio. This is not only true on average but also holds for sub-samples, including the COVID-19 crisis period. We conclude that a focus on correlations is not sufficient for extreme levels of volatility.

Suggested Citation

  • Baur, Dirk G. & Hoang, Lai T. & Hossain, Md Zakir, 2022. "Is Bitcoin a hedge? How extreme volatility can destroy the hedge property," Finance Research Letters, Elsevier, vol. 47(PB).
    • Handle: RePEc:eee:finlet:v:47:y:2022:i:pb:s1544612321005857
    DOI: 10.1016/j.frl.2021.102655
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    References listed on IDEAS

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    Cited by:

    1. Li, Yi & Lucey, Brian & Urquhart, Andrew, 2023. "Can altcoins act as hedges or safe-havens for Bitcoin?," Finance Research Letters, Elsevier, vol. 52(C).
    2. Sofia Karagiannopoulou & Konstantina Ragazou & Ioannis Passas & Alexandros Garefalakis & Nikolaos Sariannidis, 2023. "The Impact of the COVID-19 Pandemic on the Volatility of Cryptocurrencies," IJFS, MDPI, vol. 11(1), pages 1-17, March.
    3. Xia, Yufei & Sang, Chong & He, Lingyun & Wang, Ziyao, 2023. "The role of uncertainty index in forecasting volatility of Bitcoin: Fresh evidence from GARCH-MIDAS approach," Finance Research Letters, Elsevier, vol. 52(C).
    4. Sasan Barak & Navid Parvini, 2023. "Transfer‐entropy‐based dynamic feature selection for evaluating Bitcoin price drivers," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(12), pages 1695-1726, December.
    5. Dunbar, Kwamie & Owusu-Amoako, Johnson, 2022. "Hedging the extreme risk of cryptocurrency," The North American Journal of Economics and Finance, Elsevier, vol. 63(C).
    6. Echaust, Krzysztof & Just, Małgorzata, 2022. "Is gold still a safe haven for stock markets? New insights through the tail thickness of portfolio return distributions," Research in International Business and Finance, Elsevier, vol. 63(C).

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    More about this item

    Keywords

    Bitcoin; Hedge; Portfolio diversifier;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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