Does Bitcoin hedge global uncertainty? Evidence from wavelet-based quantile-in-quantile regressions

Abstract

In this study, we analyse whether Bitcoin can hedge uncertainty using daily data for the period of 17 th March, 2011, to 7 th October, 2016. Global uncertainty is measured by the first principal component of the VIXs of 14 developed and developing equity markets. We first use wavelets to decompose Bitcoin returns into various frequencies, i.e., investment horizons. Then, we apply standard OLS regressions and observe that uncertainty negatively affects raw Bitcoin return and its longer-term movements. However, given the heavy tails of the variables, we rely on quantile methods and reveal much more nuanced and interesting results. Quantile regressions indicate that Bitcoin does act as a hedge against uncertainty, that is, it reacts positively to uncertainty at both higher quantiles and shorter frequency movements of Bitcoin returns. Finally, when we use quantile-on-quantile regressions, we observe that hedging is observed at shorter investment horizons, and at both lower and upper ends of Bitcoin returns and global uncertainty.

Modelling long memory volatility in the Bitcoin market: Evidence of persistence and structural breaks

“…Baur et al (2015) and Brière, Oosterlinck, and Szafarz (2015) show that Bitcoin is uncorrelated with conventional assets and thus useful as a diversifier asset. Bouri, Gupta, et al (2017) show that Bitcoin is a hedge against global uncertainty at short investment horizons and in the bull regime. Ji, Bouri, Gupta, and Roubaud (2017) indicate that the Bitcoin market has a very weak degree of centrality in the international financial system, pointing toward its market segmentation.…”

“…Ji, Bouri, Gupta, and Roubaud (2017) indicate that the Bitcoin market has a very weak degree of centrality in the international financial system, pointing toward its market segmentation. Bouri, Gupta, et al (2017) show that Bitcoin is a hedge against global uncertainty at short investment horizons and in the bull regime. While studying the return-volatility relationship in the Bitcoin market, Bouri, Azzi, and Dyhrberg (2017) show different behaviour before and after the price crash of 2013.…”

“…However, the literature on the finance and economics of Bitcoin remains understudied, despite the empirical examination of price formation, price dynamics, hedging ability, and market efficiency of Bitcoin. Bouri, Gupta, Tiwari, and Roubaud (2017) and Bouri, Molnár, Azzi, Roubaud, and Hagfors (2017) argue that Bitcoin is part of an alternative "peerto-peer" economy. Cohen (2017) considers Bitcoin as a basic form of movement against capitalism, free trade, and globalization.…”

Predicting Bitcoin returns: Comparing the roles of newspaper- and internet search-based measures of uncertainty

“…Over the past three years, there has been a tremendous growth in research into the role of Bitcoin as a hedge against macroeconomic and financial uncertainties (see Bouri et al (2017Bouri et al ( , 2018, Aysan et al (2019) and Fang et al (2019) for detailed reviews of this literature). Demir et al (2018) show that increases in the newspaper-based measure of economic policy uncertainty (EPU) of the United States (US) developed by Baker et al (2016) tend to predict higher Bitcoin returns.…”

The Amnesiac Lookback Option: Selectively Monitored Lookback Options and Cryptocurrencies

“…Unexpected events therefore have rippling effects on the cryptocurrency market and create a volatility with few equal comparisons. China's decision to cease its bitcoin exchange in September of 2017 sent Bitcoin into a downward spiral, and as governments and regulators venture forth into the frontier that is the cryptocurrency market, events that will shock the market are sure to take place [13]. Even so, investors are increasingly accepting of cryptocurrencies as attractive investment propositions outside of speculation.…”