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Co-movement and return spillover: evidence from Bitcoin and traditional assets

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To analyze the asset attribute and hedge effect of Bitcoin, we investigate the relationship between Bitcoin and several kinds of traditional financial assets by the univariate GARCH and multivariate GARCH models. We find that Bitcoin has a unique risk-return characteristic and volatility clustering performance, its high volatility persistence similar to Gold, but different from currency. In addition, Bitcoin exhibits a significant one-way spillover effect with other variables, without a two-way spillover effect. Bitcoin is much more affected by other market shocks than other markets are affected by the impact of Bitcoin shocks, which could not be a haven but a weak hedge. From the dynamic linkage perspective, Bitcoin and Gold have different connectedness to other markets, Gold exhibits a stronger movement to other markets, especially during extreme situations. To summarize, we classify Bitcoin as a high speculative financial asset between Gold and currency, but not Gold or currency. Our study has important implications for investors, policymakers, and risk managers who are interested in Bitcoin.
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Vol.:(0123456789)
SN Bus Econ (2021) 1:122
https://doi.org/10.1007/s43546-021-00126-w
ORIGINAL ARTICLE
Co‑movement andreturn spillover: evidence fromBitcoin
andtraditional assets
ShanWu1
Received: 18 April 2020 / Accepted: 18 August 2021 / Published online: 22 September 2021
© The Author(s), under exclusive licence to Springer Nature Switzerland AG 2021
Abstract
To analyze the asset attribute and hedge effect of Bitcoin, we investigate the rela-
tionship between Bitcoin and several kinds of traditional financial assets by the uni-
variate GARCH and multivariate GARCH models. We find that Bitcoin has a unique
risk-return characteristic and volatility clustering performance, its high volatility
persistence similar to Gold, but different from currency. In addition, Bitcoin exhibits
a significant one-way spillover effect with other variables, without a two-way spillo-
ver effect. Bitcoin is much more affected by other market shocks than other markets
are affected by the impact of Bitcoin shocks, which could not be a haven but a weak
hedge. From the dynamic linkage perspective, Bitcoin and Gold have different con-
nectedness to other markets, Gold exhibits a stronger movement to other markets,
especially during extreme situations. To summarize, we classify Bitcoin as a high
speculative financial asset between Gold and currency, but not Gold or currency.
Our study has important implications for investors, policymakers, and risk managers
who are interested in Bitcoin.
Keywords Bitcoin· Linkage· Asset attributes· DCC–GARCH model
JEL Classification C10· C58· G1
Introduction
Since Nakamoto (2008) introduced the Bitcoin concept, many kinds of digital
encrypted currencies have emerged, like Bitcoin, Litecoin, and Ethereum, which
have experienced multiple growths in price and market value. Cryptocurrencies
have attracted many investors and researchers with their innovative, decentralized,
and high-tech characteristics (Klein etal. 2018; Wu etal. 2019). Bitcoin is the most
famous one; since its birth in 2009, the price and trading volume have experienced
* Shan Wu
9120191068@nufe.edu.cn
1 School ofFinance, Nanjing University ofFinance andEconomics, Nanjing, China
Content courtesy of Springer Nature, terms of use apply. Rights reserved.
... The author shows that Bitcoin and stock market returns are positively correlated during financial market downturns, in sharp contrast to the behaviour of gold returns, which is widely believed to be a hedging instrument against stock market downfalls. These findings are challenged by (i) [6,7], who show that gold is very sensitive to uncertainty shock from cryptocurrency markets, and by (ii) [7], who employs a timevarying parameter vector autoregressive model to show that gold is vulnerable to return and volatility spillovers from cryptocurrency uncertainty measures. The difference in behaviour between Bitcoin and commodities returns is carried out also for higher-order moments. ...
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