Volatile safe-haven asset: Evidence from Bitcoin

James Yae and George Zhe Tian

Journal of Financial Stability, 2024, vol. 73, issue C

Abstract: Despite high volatility, Bitcoin is known to offer diversification benefits through its relatively low correlation with stock markets. Unlike traditional safe-haven assets, Bitcoin prices strongly respond to time-varying correlations and diversification benefits. We find that a decrease (an increase) in correlation between Bitcoin and S&P500 index returns strongly predicts higher (lower) Bitcoin returns the next day. Under the classical mean–variance framework, we develop a stylized model of Bitcoin prices utilizing extreme disagreement among heterogeneous Bitcoin investors. When our model is calibrated to the observed predictability of Bitcoin returns, the model simultaneously explains the lack of predictability in traditional safe-haven assets such as gold and long-term treasuries.

Keywords: Safe-haven asset; Bitcoin; Time-varying correlation; Return predictability (search for similar items in EconPapers)
JEL-codes: D83 G12 G15 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:73:y:2024:i:c:s1572308924000706

DOI: 10.1016/j.jfs.2024.101285

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