Is Bitcoin a hedge? How extreme volatility can destroy the hedge property

Dirk G. Baur; Lai T. Hoang; Md Zakir Hossain

doi:10.1016/j.frl.2021.102655

Is Bitcoin a hedge? How extreme volatility can destroy the hedge property

Dirk G. Baur, Lai T. Hoang, Md Zakir Hossain

Research output: Contribution to journal › Article › Research › peer-review

23 Citations (Scopus)

Abstract

A large literature tests whether Bitcoin can hedge portfolio risk, i.e. reduce the risk if added to a portfolio. Intuitively, given the extreme volatility and thus risk of Bitcoin and cryptocurrencies, the idea that Bitcoin is a hedge may be puzzling. Indeed, we show that for extreme levels of volatility, Bitcoin does not reduce the risk if added to a benchmark equity portfolio. This is not only true on average but also holds for sub-samples, including the COVID-19 crisis period. We conclude that a focus on correlations is not sufficient for extreme levels of volatility.

Original language	English
Article number	102655
Number of pages	13
Journal	Finance Research Letters
Volume	47
Issue number	Part B
DOIs	https://doi.org/10.1016/j.frl.2021.102655
Publication status	Published - Jun 2022
Externally published	Yes

Keywords

Bitcoin
Hedge
Portfolio diversifier

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10.1016/j.frl.2021.102655

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abstract = "A large literature tests whether Bitcoin can hedge portfolio risk, i.e. reduce the risk if added to a portfolio. Intuitively, given the extreme volatility and thus risk of Bitcoin and cryptocurrencies, the idea that Bitcoin is a hedge may be puzzling. Indeed, we show that for extreme levels of volatility, Bitcoin does not reduce the risk if added to a benchmark equity portfolio. This is not only true on average but also holds for sub-samples, including the COVID-19 crisis period. We conclude that a focus on correlations is not sufficient for extreme levels of volatility.",

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AB - A large literature tests whether Bitcoin can hedge portfolio risk, i.e. reduce the risk if added to a portfolio. Intuitively, given the extreme volatility and thus risk of Bitcoin and cryptocurrencies, the idea that Bitcoin is a hedge may be puzzling. Indeed, we show that for extreme levels of volatility, Bitcoin does not reduce the risk if added to a benchmark equity portfolio. This is not only true on average but also holds for sub-samples, including the COVID-19 crisis period. We conclude that a focus on correlations is not sufficient for extreme levels of volatility.

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Is Bitcoin a hedge? How extreme volatility can destroy the hedge property

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Keywords

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