Abstract
Previous studies have shown that cryptocurrencies could hedge equities. However, most of those studies did not take into account the recent cryptocurrencies bubbles in 2018 and domestic currencies. Therefore, this research aimed to study whether the hedge effectiveness of cryptocurrencies still exists. This research used five cryptocurrencies (bitcoin, ethereum, monero, ripple, and litecoin), equity indices (Indonesia, Malaysia, Vietnam, Thailand, and the Philippines), and iShares ETF MSCI World (developed world). Commodities-based hedging using iShares S&P GSCI Commodity-Indexed Trust was also analyzed as a comparison. The asymmetric generalized dynamic conditional correlation (AG-DCC) GARCH showed that one cryptocurrency could not significantly and consistently hedge equities while five equally weighted cryptocurrencies could marginally hedge equities. Meanwhile, the classical minimum variance model also showed that the hedge effectiveness of cryptocurrencies was insignificantly positive. Equity traders could add cryptocurrencies into portfolios when the purpose was to maximize the Sharpe ratio instead of hedging. Overall, commodities were the better hedge for Southeast Asia emerging markets.
Highlights
Since the work of Markowitz (1952), many researchers have focused on the advantages of diversification and many studies have analyzed the optimal combination of assets that could maximize returns and minimize volatility
This finding is similar to Bouri et al (2019). It shows that Vietnam had the highest average daily returns compared with other emerging markets in Southeast Asia
Ripple was the riskiest cryptocurrency in this research, while commodities were riskier than equity indices commodities had lower mean returns than the equities during the study period
Summary
Since the work of Markowitz (1952), many researchers have focused on the advantages of diversification and many studies have analyzed the optimal combination of assets that could maximize returns and minimize volatility. Few studies have analyzed the correlation between cryptocurrencies and other assets (Corbet et al, 2018). The proficiency of Bitcoin to minimize market risk has been published, regardless of the speculative nature (Bouri et al., 2019). Most of those studies did not incorporate the cryptocurrency bubbles in 2018 and domestic currency
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