Can cryptocurrencies provide a viable hedging mechanism for benchmark index investors?

Abstract

This paper investigates the non-linear causal nexus at lower, medium, and upper quantiles that cryptocurrencies can generate as a hedging mechanism for international benchmark indices, as represented by the MSCI World index and its sectoral sub-indices. Significant causality-in-mean between each of the assets examined is detected at lower quantiles only in a small number of sectors, whereas all analysed assets are found to trigger important non-linear causal impacts on the volatility of the selected benchmark indices, particularly during periods denoted to possess significant asset price fluctuations. From a financial perspective, this result suggests that cryptocurrencies are developing to possess a very similar ability to that of long-standing traditional financial assets, serving as a hedging mechanism against extreme fluctuations within investor portfolios that include MSCI constituents during a variety of very different market conditions.