An Investigation of Volatility Transmission and Hedging Opportunities of Cryptocurrencies towards other Financial Assets
Keywords:Volatility Transmission, Cryptocurrencies, Hedging
Asset allocation towards a specific portfolio is solely based on the diversification property among financial as well as non-financial assets. This paper is an attempt to see the investibility and role of diversification of cryptocurrencies with other financial assets. The study is utilizing the extensive data on Bitcoins and GSPC-Index, MSCI-Global Index, MSCI-Currency Index, COMEX closing Gold Price, and OPEC Crude oil Prices. The investigation aims to assess the direction and swap capability of the cryptocurrency (Bitcoin) towards the other global financial assets. The hypothesis of the study is whether the volatility created by bitcoin is transmitted towards the other financial assets using multivariate BEKK-GARCH methodology. The results indicated that any shock that appeared in bitcoin is significantly decreasing the volatility of all selected assets except MSCI-Global Index returns. The study found that the use of cryptocurrencies into the portfolio would offer diversification benefits to investors. The results are more beneficial for the risk-averse investor, who wants to hedge their portfolio through the inclusion of the negatively correlated security.