ArticlePublisher preview available

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

DOI:10.1007/s43546-021-00126-w
Authors:
Shan Wu at Nanjing University of Finance and Economics
Shan Wu
Read publisher preview
Download citation
To read the full-text of this research, you can request a copy directly from the author.

Abstract and Figures

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.
Figures - available from: SN Business & Economics
This content is subject to copyright. Terms and conditions apply.
  • A preview of this full-text is provided by Springer Nature.
  • Learn more
Preview content only
Content available from SN Business & Economics
This content is subject to copyright. Terms and conditions apply.
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. ...
Exploring Dependence Relationships between Bitcoin and Commodity Returns: An Assessment Using the Gerber Cross-Correlation
Article
Full-text available
  • Aug 2022
We use a robust measure of non-linear dependence, the Gerber cross-correlation statistic, to study the cross-dependence between the returns on Bitcoin and a set of commodities, namely wheat, gold, platinum and crude oil WTI. The Gerber statistic enables us to obtain a more robust co-movement measure since it is neither affected by extremely large nor small movements that characterise financial time series; thus, it strips out noise from the data and allows us to capture effective co-movements between series when the movements are “substantial”. Focusing on the period 2014–2022, we construct the bootstrapped confidence intervals for the Gerber statistic and test the null that all the Gerber cross-correlations up to lag kmax are zero. Our results indicate a low degree of dependence between Bitcoin and commodities prices, both when we consider contemporaneous correlation and when we employ correlations between current Bitcoin and lagged (one day, one week, or one month) commodities returns. Further, the cross-correlation between Bitcoin and commodities’ returns, although scanty, shows an increasing trend during periods of economic, health and financial turbulence. This increased cross-correlation of returns during hectic market periods could be due to the contagion effect of some markets by others, which could also explain the strong dependence across volatilities we detected. Based on our results, Bitcoin cannot be considered the “new digital gold”. Keywords: Gerber correlation; cross-correlation; comovements; Bitcoin
View
Does Bitcoin Hedge Commodity Uncertainty?
Article
Full-text available
  • Jun 2020
This paper examines the connectedness between Bitcoin and commodity volatilities, including oil, wheat, and corn, during the period Oct. 2013–Jun. 2018, using time- and frequency-domain frameworks. The time-domain framework’s results show that the connectedness is 23.49%, indicating a low level of connection between Bitcoin and the commodity volatilities. Bitcoin contributes only 2.55% to the connectedness, while the wheat volatility index accounts for 12.51% of the total connectedness. The frequency connectedness shows that Bitcoin’s contribution to the total connectedness increases from high-frequency to low-frequency bands, and the total connectedness reaches up to 22.47%. It also indicates that Bitcoin is the spillover transmitter to the wheat volatility, while being the spillover receiver from the oil and corn volatilities. The findings suggest that Bitcoin could be a hedger for commodity volatilities.
View
Quantile spillovers and dependence between Bitcoin, equities and strategic commodities
Article
This paper has two aims. We first examine the dynamic spillovers between Bitcoin and 12 developed equities, gold, and crude oil for different market conditions using a Bayesian Time-Varying Parameter Vector Autoregressive (TVP-VAR) model with daily spot prices. Our econometric approach enables us to capture the left and right tails as well as the shoulders of the return distribution corresponding to volatility spillovers under the bear, normal, and bull market states among these financial assets. We quantify and trace the dependence and directional predictability from Bitcoin to other assets using the sample cross-quantilogram. Our key findings offer convincing evidence of time variation in the level of volatility. Spillovers between Bitcoin and other financial assets intensify during extreme global market conditions. Secondly, results from the cross-quantilogram indicate strong dependence and positive directional predictability between Bitcoin and most equities and crude oil when market returns are bullish. However, during the bearish market period, there is negative dependence and predictability from Bitcoin to stocks in Finland, the Netherlands, the U.S.A, and the crude oil market only. This implies that Bitcoin can act as a hedge to stocks in Finland, the Netherlands, the U.S.A, and the crude oil market. However, insignificant dependence and directional predictability from Bitcoin to the remaining assets indicate that Bitcoin may act as a safe-haven to these assets during bearish markets. Our findings hold important implications for both international investors and portfolio managers who consider Bitcoin as part of their portfolio diversification and other investment strategies.
View
Studying the properties of the Bitcoin as a diversifying and hedging asset through a copula analysis: Constant and time-varying
Article
In this study, we analyze the properties of Bitcoin as a diversifier asset and hedge asset against the movement of international market stock indices: S&P500 (US), STOXX50 (EU), NIKKEI (Japan), CSI300 (Shanghai), and HSI (Hong Kong). For this, we use several copula models: Gaussian, Student-t, Clayton, Gumbel, and Frank. The analysis period runs from August 18, 2011 to June 31, 2019. We found that the Gaussian and Student-t copulas are best at fitting the structure dependence between markets. Also, these copulas suggest that under normal market conditions, Bitcoin might act as a hedge asset against the stock price movements of all international markets analyzed. However, the dependence on the Shanghai and Hong Kong markets was somewhat higher. Also, under extreme market conditions, the role of Bitcoin might change from hedge to diversifier. In a time-varying copula analysis, given by the Student-t copula, we found that even under normal market conditions, for some markets, the role of Bitcoin as a hedge asset might fail on a high number of days.
View
Do bitcoin and precious metals do any good together? An extreme dependence and risk spillover analysis
Article
The speculative nature of Bitcoin over the last 5 years documents high returns for investors and can also provide optimal returns with a good mix of some assets with hedging abilities. We analyze extreme dependence and risk spillover between Bitcoin and a sample of precious metal commodities comprising of gold, silver, copper, wheat, platinum and palladium over a sample period of April 2013–January 2018 based on daily data. We test the long memory properties of our sampled assets using ARFIMA-FIGARCH model followed by followed by time varying copula framework. Later we use VaR, CoVaR and ΔCoVaR tests to measure risk spillover and resulting asymmetries. Our results contribute towards the existing literature by reporting the hedging ability of gold for Bitcoin and the effect that have on precious metal returns. In this way our results provide insights in both the direction. Our results also document spillover from Bitcoin to precious metal market however in terms of directional spillover from precious metals to Bitcoin, silver remains insensitive to any downside risk spillover. We also report asymmetries in upside and downside ΔCoVaR values, suggesting that extreme changes in returns in either of the market has the potential to affect extreme returns in the other market. Our results have implications for individual investor and fund managers in formulating an optimal portfolio yielding returns with hedge against extreme downward price movements.
View
Quantifying the Spillover Effect in the Cryptocurrency Market
Article
  • May 2020
The study quantifies the spillover effects in the cryptocurrency market using a rolling-window Bayesian Vector Autoregressive Model. The present study offers a better understanding of the interconnectedness and the shock transmission in the cryptocurrency market, as it quantifies spillover risk at the pairwise directional level, offering a dynamic understanding of the shock fluctuation within the market, uncovering periods of risk integration. In addition, the study investigates the determinants of the spillover shocks in the cryptocurrency market, revealing the increasing connections to external drivers over time.
View
Does Bitcoin hedge crude oil implied volatility and structural shocks? A comparison with gold, commodity and the US Dollar
Article
In this article, we examine the hedging and safe-haven properties of Bitcoin against crude oil implied volatility (OVX) and structural shocks using a dummy variable GARCH and quantile regression model. In addition, we also compare the hedging and safe-haven performance of Bitcoin with gold, commodity and US Dollar. We conclude that Bitcoin is not the superior asset over others to hedge oil-related uncertainties. Besides, hedging capacity of different assets is conditional upon the nature of oil risks and market situation. Thus, investors may prefer different investment instruments to hedge downside risks in different economic situations and market states.
View
Does Gold or Bitcoin Hedge Economic Policy Uncertainty?
Article
  • Apr 2019
Calculating the hedge and safe-haven properties of gold and Bitcoin via GARCH model and quantile regression with dummy variables. We find that: (1) Neither gold nor Bitcoin can serve as a strong hedge or safe-haven for economic policy uncertainty (EPU) at the average condition. (2) Bitcoin is more responsive to EPU shocks, while gold maintains stability with smaller hedge and safe-haven coefficients. (3) In most cases, both gold and Bitcoin can act as the weak hedge and weak safe-haven against EPU during the extreme bearish and bullish markets, which two can be considered for portfolio diversification during the normal market.
View
Bitcoin is not the New Gold – A comparison of volatility, correlation, and portfolio performance
Article
Cryptocurrencies such as Bitcoin are establishing themselves as an investment asset and are often named the New Gold. This study, however, shows that the two assets could barely be more different. Firstly, we analyze and compare conditional variance properties of Bitcoin and Gold as well as other assets and find differences in their structure. Secondly, we implement a BEKK-GARCH model to estimate time-varying conditional correlations. Gold plays an important role in financial markets with flight-to-quality in times of market distress. Our results show that Bitcoin behaves as the exact opposite and it positively correlates with downward markets. Lastly, we analyze the properties of Bitcoin as portfolio component and find no evidence for stable hedging capabilities. We conclude that Bitcoin and Gold feature fundamentally different properties as assets and linkages to equity markets. Our results hold for the broad cryptocurrency index CRIX. As of now, Bitcoin does not reflect any distinctive properties of Gold other than asymmetric response in variance.
View
Does Gold act as a Safe haven against Exchange Rate Fluctuations? The case of Pakistan Rupee
Article
Investors often look for a refuge to avoid undesirable exposures to risk during period of extreme downturns in currency returns. We investigate daily gold and Rupee exchange rates depreciation against set of currencies over the period of 1992-2015. Using Wavelets at multiple time horizons; we find that gold act as a consistent short run hedge against exchange rate hence validating the exchange rate destruction hypothesis. This finding is helpful for speculators in their decision making while taking long and short positions accordingly. This finding suggests that central bank also need to keep other safe haven assets in reserves because the hedging ability of gold is only limited to short run. Further, the role of gold in providing protection against currency risks is also confirmed using Quintile regression. These results assist portfolio managers and governments in formulating effectual diversification strategy for preserving investment portfolio any extreme event condition. Our results also suggest that gold has a lead relationship with exchange rate; however, this relationship switches over specific time intervals. This finding is of major concern for policy makers in determining the extent of stabilization in gold prices to bring consistency to exchange rate. Finally, the Granger coherence coefficients confirm that the strength of the causal relationship varies across over all frequencies. These conclusions have important implications for policy makers, economic analysts, portfolio managers and institutional investors.
View
Exploring the dynamic relationships between cryptocurrencies and other financial assets
Article
We analyse, in the time and frequency domains, the relationships between three popular cryptocurrencies and a variety of other financial assets. We find evidence of the relative isolation of these assets from the financial and economic assets. Our results show that cryptocurrencies may offer diversification benefits for investors with short investment horizons. Time variation in the linkages reflects external economic and financial shocks.
View