Diversifying with cryptocurrencies during COVID-19

John Goodell and Stéphane Goutte
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John Goodell: University of Akron

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Abstract: Literature suggests assets become more correlated during economic downturns. The current COVID-19 crisis provides an unprecedented opportunity to investigate this considerably further. Further, whether cryptocur-rencies provide a diversification for equities is still an unsettled issue. Additionally , the question of whether cryptocurrency futures are safe havens has received very little attention. We employ several econometric procedures , including wavelet coherence, copula principal component, and neural network analyses to rigorously examine the role of COVID-19 on the paired co-movements of six cryptocurrencies, as well as bitcoin futures, with fourteen equity indices and the VIX. We find co-movements between cryptocurrencies and equity indices gradually increased as COVID-19 progressed. However, most of these co-movements are positively correlated, suggesting that cryptocurrencies do not provide a diversification benefit during downturns. Exceptions, however, are the co-movements of bitcoin futures and tether being negative with equities. Results are consistent with investment vehicles that attract either more informed or more speculative investors differentiating themselves as safe havens.

Keywords: Co-movement; COVID-19; Bitcoin; Wavelet; Safe haven JEL classification: C58 (search for similar items in EconPapers)
Date: 2021-07
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-02876529
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Published in International Review of Financial Analysis, 2021, 76, pp.101781. ⟨10.1016/j.irfa.2021.101781⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-02876529

DOI: 10.1016/j.irfa.2021.101781

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