Is the cryptocurrency market a hedge against stock market risk? A Wavelet and GARCH approach

Abstract

This study analyses six major cryptocurrencies and four global stock markets to explore the role of cryptocurrencies as a hedge, safe haven, and diversifier in stock markets. The study employs ADCC‐GARCH and Wavelet Coherence Technique, using daily data from 4 January 2017 to 28 February 2023. The study has found that stock returns and unstable cryptocurrency returns have high volatility persistence in the long run. Besides, while unstable digital currencies (Bitcoin, Ethereum, Binance Coin, and Dogecoin) serve as a hedge during stable economic periods, they have not been a hedge during economic turmoil in the stock markets. Conversely, stablecoins (Tether and USD Coin) have been shown to have acted as a hedge during normal economic times and have offered a safe haven during economic downturns. Except for Tether, all cryptocurrencies' diversification capacity is time‐varying. In stable economic conditions, they serve as diversifiers, but during turmoil, they do not. However, Tether serves as a diversifier regardless of the financial situation. Finally, the present investigation is expected to offer crucial information on hedge, safe haven and diversification for quasi‐investors.

Connectedness Between Gold-Backed Cryptocurrencies and the G7 Stock Market Indices During Global Crises: Evidence From the Quantile Vector Autoregression Approach

“…The repercussions of the recent health crisis, geopolitical tensions, and the SVB collapse generated a complicated setting, encouraging stock market investors to look for safety in assets that are not correlated with other assets or portfolios, particularly safe-haven assets. In this regard, investors mostly turn to the most known traditional safe-haven assets, namely gold and Bitcoin (Abdelmalek & Benlagha, 2023;Ali et al, 2023;Aloui et al, 2023;Al-Yahyaee et al, 2019;Baur & Lucey, 2010;Bouri et al, 2017Bouri et al, , 2020Jana & Sahu, 2023a, 2023a, 2023b. However, little attention has been given to the abilities of other types of crypto assets, such as stablecoins.…”