Abstract
This study examines the connectedness between the US yield curve components (i.e., level, slope, and curvature), exchange rates, and the historical volatility of the exchange rates of the main safe-haven fiat currencies (Canada, Switzerland, EURO, Japan, and the UK) and the leading cryptocurrency, the Bitcoin. Results of the static analysis show that the level and slope of the yield curve are net transmitters of shocks to both the exchange rate and its volatility. The exchange rate of the Euro and the volatility of the Euro and the Canadian dollar exchange rate are net transmitters of shocks. Meanwhile, the curvature of the yield curve and the Japanese Yen, Swiss Franc, and British Pound act mainly as net receivers. Our static connectedness analysis shows that Bitcoin is mainly independent of shocks from the yield curve’s level, slope, and curvature, and from any main currency investigated. These findings hint that Bitcoin might provide hedging benefits. However, similar to the static analysis, our dynamic analysis shows that during different periods and particularly in stressful times, Bitcoin is far from being isolated from other currencies or the yield curve components. The dynamic analysis allows us to observe Bitcoin’s connectedness in times of stress. Evidence supporting this contention is the substantially increased connectedness due to policy shocks, political uncertainty, and systemic crisis, implying no empirical support for Bitcoin’s safe-haven property during stress times. The increased connectedness in the dynamic analysis compared with the static approach implies that in normal times and especially in stressful times, Bitcoin has the property of a diversifier. The results may have important implications for investors and policymakers regarding their risk monitoring and their assets allocation and investment strategies.
Highlights
The outbreak of the COVID-19 pandemic in early 2020 reinvigorated the search for useful risk management, hedging strategies, and investors’ demand for safe-haven assets. traditionally major currencies have been regarded as safe-haven assets, several financial market downturns, such as the 2008 subprime crisis and the 2011 sovereignAharon et al Financ Innov (2021) 7:59 debt crisis, raised doubts about their diversification benefits in turbulent times
Bitcoin and cryptocurrencies have been designed to be detached from any conventional monetary systems; we present the first attempt to explore whether movements in different parts of the yield curve are connected to the behavior of Bitcoin’s price
Summary and conclusions This paper explores the connectedness between the major forex currencies, Bitcoin, and the components of the US yield curve
Summary
The outbreak of the COVID-19 pandemic in early 2020 reinvigorated the search for useful risk management, hedging strategies, and investors’ demand for safe-haven assets. Inspired by the growing stream of literature focused on the connectedness of various financial and economic variables, the current study analyzes the joint and pairwise connectedness of the yield curve components, Bitcoin, and five major safe-haven currencies (the Canadian dollar [CAD], the Euro, the Japanese Yen [JPY], the Swiss Franc [CHF], and the British Pound Sterling [GBP]) We explore their connectedness in a static framework and under different market conditions in a dynamic time-varying framework. They demonstrated an asymmetric pattern in spillovers concerning positive and negative returns in the Bitcoin market Our paper extends these examinations regarding these major currencies and analyzes their connectedness with the yield curve components and Bitcoin. We utilize the zero-coupon sovereign yield for the US with 15 monthly maturities, including 3, 6, 9, 12, 24, 36, 48, 60, 72, 84, 96, 108, 120, 240, and
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