Institutional Repository [SANDBOX]
Technical University of Crete
EN  |  EL

Search

Browse

My Space

Hedging uncertainty with cryptocurrencies: is bitcoin your best bet?

Koutmos Dimitrios, King Timothy, Zopounidis Konstantinos

Full record


URI: http://purl.tuc.gr/dl/dias/0684F049-C1F9-4146-9A58-EAA3EA391E5C
Year 2021
Type of Item Peer-Reviewed Journal Publication
License
Details
Bibliographic Citation D. Koutmos, T. King, and C. Zopounidis, “Hedging uncertainty with cryptocurrencies: is bitcoin your best bet? ,” J. Financ. Res., vol. 44, no. 4, pp. 815–837, Dec. 2021, doi: 10.1111/jfir.12264. https://doi.org/10.1111/jfir.12264
Appears in Collections

Summary

Are cryptocurrencies useful minimum-variance hedging instruments? This paper develops a two-step analytical framework to explore this question across time. First, it estimates dynamic optimal weights, calibrated when investing between the aggregate market and a respective sampled cryptocurrency. This is performed separately for 11 major cryptocurrencies using the dynamic conditional correlation approach of Engle. Second, using a fractional regression approach, it uncovers linkages between optimal weights in cryptocurrencies and sources of economic uncertainty. Overall, this paper makes the following important findings. First, optimal weights in cryptocurrencies all rose rapidly during the COVID-19 pandemic. In all, bitcoin showed to be the leading cryptocurrency in terms of hedging effectiveness during this recent time period. Second, most cryptocurrencies exhibit zero or negative betas consistently across time, thus making them natural hedging instruments for investors seeking to reduce their portfolio's comovement with the market. Finally, cryptocurrencies serve as better hedges for economic uncertainties arising from equity and commodity markets. They are relatively less effective for uncertainties arising from risks in the banking industry and firm default risk. This paper contributes broadly to the asset pricing literature since our two-step approach herein can tractably be extended to other asset classes or other econometric measures of systematic risk.

Services

Statistics