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Volatility forecasting, downside risk, and diversification benefits of Bitcoin and oil and international commodity markets: A comparative analysis with yellow metal

Khamis Hamed Al-Yahyaee, Walid Mensi, Idries Mohammad Wanas Al-Jarrah, Atef Hamdi and Sang Hoon Kang

The North American Journal of Economics and Finance, 2019, vol. 49, issue C, 104-120

Abstract: This study examines the diversification and hedging properties of Bitcoin (BTC) and gold assets for oil and S&P GSCI investors. We model and forecast the volatility performance of the pairs BTC–oil, gold–oil, BTC–S&P GSCI, and gold–GSCI using five bivariate DCC-GARCH family models, two popular forecasting measures (MSE and MAE), the Diebold and Mariano (1995) test, and different risk measures (value-at-risk, expected shortfall, semivariance, and regret) for different portfolios. We find that BTC and gold provide diversification benefits for oil and S&P GSCI. Moreover, by comparing the fitting and forecast performances of the five GARCH models, we find that the standard GARCH model is the best for the gold–oil and BTC–S&P GSCI pairs, while the HYGARCH model is the best for the BTC–oil and gold–S&P GSCI pairs regardless of the time horizon. Finally, we find strong evidence of hedging effectiveness and downside risk reductions, confirming the importance of BTC and gold in oil and S&P GSCI portfolio management.

Keywords: Bitcoin; Commodity markets; Forecasting; Downside risk; Multivariate GARCH models (search for similar items in EconPapers)
JEL-codes: C58 F37 G14 G15 Q31 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.najef.2019.04.001

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