Are cryptocurrencies connected to gold? A wavelet‐based quantile‐in‐quantile approach

Abstract

AbstractAccurate measurement of relationship between assets is sensitive to different market conditions in different horizons and has implications for portfolio optimization. Cryptocurrencies are new category of assets that can reduce the risk of well‐diversified portfolio including gold. The paper explores the connections between seven cryptocurrencies and gold at bear (bull) markets across time to uncover the hedging properties of cryptocurrencies for gold investors. Wavelet technique was used to decompose the daily return series of the assets into short‐, medium‐ and long‐term frequencies. Quantile regression (QR) and quantile‐in‐quantile regression (QQR) were applied on the decomposed series to establish the association between the assets over 19 quantiles (τ = 0.05 to 0.95). QR results show all cryptocurrencies as hedges for gold regardless of market regime in the medium to long‐terms. QQR results depict inverse association at bear market but positive association at bull market across time suggesting hedging possibilities at bear markets. Our study provides precise information to investors, regulators and policy makers on risk mitigating strategies for extreme gold market fluctuations across time and market states.