Does bitcoin provide hedge to Islamic stock markets for pre- and during COVID-19 outbreak? A comparative analysis with gold

Abstract

This paper applies the DCC-FIGARCH model to investigate the role of Bitcoin as a hedge and safe haven for Islamic stock markets in comparison with gold. We use daily data for the period January 2010–May 2020, which covers the recent COVID-19 pandemic. Empirical results show that the dynamic correlation between Bitcoin and Islamic stock markets is low and usually negative during major economic and political events suggesting that Bitcoin qualifies as a safe haven against Islamic stock markets downturns. Extending our analysis to portfolio management, findings reveal that the diversification benefits of Bitcoin are most times stable and increase significantly during turbulent periods. Thereby, adding Bitcoin in a portfolio of Islamic stocks reduce the risk of portfolio. Finally, as regards the COVID-19 outbreak period, we find that the hedging strategy involving Bitcoin leads to a higher cost during the crisis. These results provide substantial recommendations for Islamic investors and portfolio managers.

How do crude oil futures hedge crude oil spot risk after the COVID-19 outbreak? A wavelet denoising-GARCHSK-SJC Copula hedge ratio estimation method

“… [16] and Chkili et al. [26] , we use the hedging effectiveness (HE) proposed by Ederington [56] to evaluate the hedging performance, which is described as follows: …”

“…Chkili et al. [26] adopt DCC-FIGARCH to research the role of Bitcoin as a hedge for Islamic stocks after the epidemic outbreak. The empirical results report that although Bitcoin plays a hedge for stocks, however, the hedging strategy involving Bitcoin has higher cost.…”

“…On the other hand, the hedging effectiveness of different futures during the COVID-19 period has received enough attention in academia, however, there are still some research gaps and shortcomings: (1) The existing studies have examined the roles of many assets such as Bitcoin, crude and gold futures as hedge tools for spots through constructing in-sample hedging portfolios after the epidemic outbreak [25] , [26] , [27] , [28] , [29] . However, as Lai [18] and Bali et al.…”

“…Secondly, on the one hand, existing hedging literature only examines the in-sample hedge effectiveness after the epidemic happened [25] , [26] , [27] , [28] , [29] , [30] . However, how to evaluate the investment performance depends on the out-of-sample tests [18] .…”

Fintech in islamic finance literature: A review

“…Thus, the finding of this study will be more insightful if the study compares the volatility pre-and during COVID-19. (Chkili et al, 2021) This study examines the differences between the Islamic stock market and bitcoin in facing an economic slowdown. Several studies have assessed the empirical nature of cryptocurrencies along with Islamic equity and capital markets to understand the riskreturn tradeoff and whether they provide diversification and hedging opportunities.…”