A war in a pandemic- The recent spike in economic uncertainty and the hedging abilities of Bitcoin

Refk Selmi

Economics Bulletin, 2022, vol. 42, issue 3, 1422 - 1431

Abstract: The ongoing Russian/Ukrainian war, along with sanctions imposed on Russia, poses a major shock to the world economy, merely two years after the COVID-19 pandemic. Accordingly, the global economic policy uncertainty has surged due to the resulting spiraling energy prices and economic disruptions. This paper uses a quantile-on-quantile approach to compare the ability of Bitcoin to hedge the economic policy uncertainty (EPU) of major global Bitcoin exchange markets (China, Japan, Korea and the United States) for the periods prior to and post-the COVID-19 and Russia's invasion of Ukraine. The results reveal that, prior to the pandemic, significant rises in EPU lead to high Bitcoin returns. After the COVID-19 and the recent war in Ukraine, the hedge effectiveness of Bitcoin is weakening due to the tight correlation with stocks in times of rising inflation expectations and the global central banks' hawkish response to it. Moreover, the Bitcoin hedging property is country-specific, and depends to different Bitcoin market conditions and various uncertainty levels. We explain this heterogeneity by differences across countries in terms of the recognition of Bitcoin as a legal tender, the Bitcoin trading volume, the exchange market maturity, and the investors' attitude towards risk.

Keywords: Bitcoin; the COVID-19; the war in Ukraine; the economic policy uncertainty; hedge; country-specific analysis. (search for similar items in EconPapers)
JEL-codes: F3 G1 (search for similar items in EconPapers)
Date: 2022-09-30
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