Time and frequency dynamics of connectedness and hedging performance in global stock markets: Bitcoin versus conventional hedges

Peijin Wang, Hongwei Zhang, Cai Yang and Yaoqi Guo

Research in International Business and Finance, 2021, vol. 58, issue C

Abstract: Some studies have revealed the hedging ability of Bitcoin against stock markets, but the knowledge of how it compares with other hedges is in its infancy. This paper presents the first study on time-frequency domain connectedness and hedging among five hedges (Bitcoin, crude oil, commodities, gold and the U.S. dollar (USD) index) and four stock indices (developed markets ex U.S., emerging markets ex China, U.S. and China). We find that the connectedness between hedges and stock markets varies by time across time horizons. Specifically, the connectedness between Bitcoin and stock indices is the smallest among all hedges, especially for the short horizon. Gold and USD are isolated from other markets at longer horizons. The hedging ratio, optimal portfolio weights and hedging effectiveness also vary across investment horizons. For short-term investment, gold has better hedging effectiveness, especially for emerging stock markets and the U.S. stock market. For median- and long-term investment, USD has better performance, especially for developed markets ex U.S. and emerging stock markets. Additionally, although Bitcoin has good hedging properties, it has high volatility compared with other hedging assets. In other words, if Bitcoin is included in a portfolio, investors should pay attention to its wide variation. These empirical findings highlight the important role that gold and USD play in hedging against global stock markets.

Keywords: Bitcoin; Stock; Frequency analysis; Wavelet-based DCC-GARCH model; Connectedness; Hedging ability (search for similar items in EconPapers)
JEL-codes: G11 G15 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:58:y:2021:i:c:s0275531921001008

DOI: 10.1016/j.ribaf.2021.101479

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