Abstract
In the context of the debate on cryptocurrencies as the ‘digital gold’, this study explores the nexus between the Bitcoin and US oil returns by employing a rich set of parametric and non-parametric approaches. We examine the dependence structure of the US oil market and Bitcoin through Clayton copulas, normal copulas, and Gumbel copulas. Copulas help us to test the volatility of these dependence structures through left-tailed, right-tailed or normal distributions. We collected daily data from 5 February 2014 to 24 January 2019 on Bitcoin prices and oil prices. The data on bitcoin prices were extracted from coinmarketcap.com. The US oil prices were collected from the Federal Reserve Economic Data source. Maximum pseudo-likelihood estimation was applied to the dataset and showed that the US oil returns and Bitcoin are highly vulnerable to tail risks. The multiplier bootstrap-based goodness-of-fit test as well as Kendal plots also suggest left-tail dependence, and this adds to the robustness of the results. The stationary bootstrap test for the partial cross-quantilogram indicates which quantile in the left tail has a statistically significant relationship between Bitcoin and US oil returns. The study has crucial implications in terms of portfolio diversification using cryptocurrencies and oil-based hedging instruments.
Highlights
Uncertain price movements and risk contagions have been observed in the financial and energy markets due to unpredictability in economic development, discontinuity of economic policy and international geopolitical conflicts
Our results indicate that the Bitcoin and the US oil returns are highly exposed to tailrisk
The contribution is threefold: (i) this paper investigates the interdependence and spillover between the oil market and the Bitcoin trading market via their prices; (ii) this study employs different quantitative approaches—normal copulas, Clayton copulas and Gumbel copulas—to capture and confirm the dependence structure between Bitcoin returns and US oil returns; (iii) the robustness of the empirical findings is investigated by applying a stationary bootstrap for the partial cross-quantilogram
Summary
Uncertain price movements and risk contagions have been observed in the financial and energy markets due to unpredictability in economic development, discontinuity of economic policy and international geopolitical conflicts (e.g., see Li & Wei, 2018; Wei et al, 2017; Zhang & Wang, 2019; Mei et al, 2017; Fratzscher, 2012; and Wei et al, 2018). Selmi et al (2018) explain the strong association between Bitcoin and oil returns in terms of Bitcoin’s similarities with gold, from a risk taker’s point of view Both are considered to be “counter-cyclical” to stocks or commodities. This study makes a novel contribution in distinguishing risk management and hedging through financial modelling and fills a gap in the literature by relating the digital currency revolution to the energy markets. The contribution is threefold: (i) this paper investigates the interdependence and spillover between the oil market and the Bitcoin trading market via their prices; (ii) this study employs different quantitative approaches—normal copulas, Clayton copulas and Gumbel copulas—to capture and confirm the dependence structure between Bitcoin returns and US oil returns; (iii) the robustness of the empirical findings is investigated by applying a stationary bootstrap for the partial cross-quantilogram.
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