Are cryptocurrencies a safe haven for stock investors? A regime-switching approach

Leon Li and Peter Miu

Journal of Empirical Finance, 2023, vol. 70, issue C, 367-385

Abstract: Previous research is inconclusive regarding the diversification benefit of cryptocurrency investment. Motivated by the heterogeneous agent and financial contagion models, we develop a hypothesis on state-dependent correlation between cryptocurrency and stock returns. We apply a regime-switching model of stock–cryptocurrency returns to test our hypothesis using the four most liquid cryptocurrencies. We document a dynamic stock–cryptocurrency​ correlation that is conditional on the volatility regimes of the two assets. In particular, we find that the correlation is positive and significant when both markets are under their high-volatility states, but insignificant or even negative in other volatility states. These results imply that, although cryptocurrency can serve as a hedging asset for stock investors under normal market conditions, it is far from a safe-haven asset because of its strong co-movement with the stock market during market distress. Finally, the proposed regime-switching model proves effective in portfolio risk forecasting and portfolio risk reduction, beyond the conventional GARCH-based models.

Keywords: Cryptocurrency; Portfolio management; Variance; Correlation; Markov-switching model (search for similar items in EconPapers)
JEL-codes: C58 G11 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:70:y:2023:i:c:p:367-385

DOI: 10.1016/j.jempfin.2022.12.010

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