Hedging capabilities of Bitcoin for Asian currencies

Takuji Kinkyo

International Journal of Finance & Economics, 2022, vol. 27, issue 2, 1769-1784

Abstract: This study investigates whether Bitcoin (BTC) can provide a hedge against the fiat currencies in Asia over various investment horizons. We focus on Asia because it is one of the fastest‐growing regions worldwide, where cryptocurrencies are actively traded. A wavelet transform technique is combined with a multivariate factor stochastic volatility (SV) model to examine the dynamic correlation properties and risk reduction effectiveness of BTC in both the time and frequency domains. We use gold and oil as benchmarks and compared their results with those of BTC. The estimated correlations indicate that the Asian currencies tend to be negatively correlated with BTC; therefore, the latter could provide a hedge against the former over the medium (8–32 days) and long (32–64 days) terms. By contrast, Asian currencies tend to be positively correlated with oil and gold for the same horizons. We also analyze the downside risk reduction effectiveness of BTC for the portfolio of Asian currencies and find that BTC provides better risk reduction than oil and gold, particularly over the medium and long terms. This study makes significant contributions to the literature by demonstrating that the correlation properties and risk reduction effectiveness of BTC differ depending on the investment horizons. We believe our findings using the wavelet‐based SV model can help heterogeneous investors detect portfolio risks and thus, identify optimal hedging strategies over various investment horizons.

Date: 2022
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