Abstract
The Bitcoin market has become a research hotspot after the outbreak of Covid-19. In this paper, we focus on the relationships between the Bitcoin spot and futures. Specifically, we adopt the vector autoregression-dynamic correlation coefficient-generalized autoregressive conditional heteroskedasticity (VAR-DCC-GARCH) model and vector autoregression-Baba, Engle, Kraft, and Kroner-generalized autoregressive conditional heteroskedasticity (VAR-BEKK-GARCH) models and calculate the hedging effectiveness (HE) value to investigate the dynamic correlation and volatility spillover and assess the risk reduction of the Bitcoin futures to spot. The empirical results show that the Bitcoin spot and futures markets are highly connected; second, there exists a bi-directional volatility spillover between the spot and futures market; third, the HE value is equal to 0.6446, which indicates that Bitcoin futures can indeed hedge the risks in the Bitcoin spot market. Furthermore, we update the data to the post-Covid-19 period to do the robustness checks. The results do not change our conclusion that Bitcoin futures can hedge the risks in the Bitcoin spot market, and besides, the post-Covid-19 results indicate that the hedging ability of Bitcoin futures increased. Finally, we test whether the gold futures can be used as a Bitcoin spot market hedge, and we further control other cryptocurrencies to illustrate the hedging ability of the Bitcoin futures to the Bitcoin spot. Overall, the empirical results in this paper will surely benefit the related investors in the Bitcoin market.
Highlights
The global outbreak of Covid-19 has led to over 87.6 million cumulative confirmed cases, with over 1.9 million deaths as of January 2021, according to the official dataset by the World Health Organization (WHO)
We re-do the VAR-BEKK-GARCH estimations, and the results show that the gold futures market can be used to hedge the risks from the novel Bitcoin spot market despite the hedging effectiveness (HE) value being much smaller compared to the Bitcoin futures market
We control other cryptocurrencies to further investigate the hedging ability of the Bitcoin futures to the Bitcoin spot, the results prove that the even other factors which are closely related to the Bitcoin market, are controlled, the Bitcoin futures can still reduce the corresponding risks in the Bitcoin spot market
Summary
The global outbreak of Covid-19 has led to over 87.6 million cumulative confirmed cases, with over 1.9 million deaths as of January 2021, according to the official dataset by the World Health Organization (WHO). The disease is highly contagious, and, the global healthcare systems, the real economy, and the financial sphere are severely affected [1, 2]. What is worse, according to Hanif et al [3], the economic and financial consequences of the Covid-19 pandemic exceed those of the 2008 global financial crisis (GFC). The Covid-19 pandemic outbreak has paralyzed both the domestic and international economic activity and financial markets in countries. Major countries have implemented the expansionary monetary policy to help the economy to survive from the Covid-19. Despite the intention is to help the economy recover, monetary policies have inevitably pushed up asset prices. Among all the assets that are rising in price, Bitcoin, one of the most commonly known cryptocurrencies, is of particular interest, as the price increases are very substantial
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