Hedge Asset Research Articles

Portfolio Management in Times of Elevated Risk. Safe-Haven and Hedge Assets in CAPM Setting

The purpose of the article. The purpose of the article is to present the safe-haven concept according to the latest academic literature and distinguish it from the hedge and diversifier terms that are sometimes used interchangeably by researchers and portfolio managers. The ultimate goal of the paper is to place the safe-haven and hedge assets in the portfolio theory setting by introducing the negative beta parameter as stated in the Capital Asset Pricing Model. According to the literature, this article proposes a few approaches to identify and characterize safe-haven assets and to discover the perspective and outline further research in the portfolio theory. Methodology. The work uses the method of descriptive and comparative analysis of literature, i.e., Systematic Literature Review (SLR). This method is used to present scientific overview of portfolio management when uncertainty rises to identify safe-haven and hedge assets. Results of the research. This paper aims to characterize and identify three main types of assets helping investors to reduce the portfolio risk: safe haven, hedge, and diversifier. It introduces an improved analytical framework of beta parameter and drawdown beta concept to contribute to the rapidly expanding research on portfolio theory. Lastly it depicts a trade-off effect, which is stronger in-crisis performance of safe-haven assets. The returns of safe-haven assets are more positive when the stock market returns are more negative that may safeguard the financial system.

The effect of COVID-19 and U.S. monetary policy on Bitcoin and stock market volatility: an application of DCC-GARCH model

During the COVID-19 pandemic and subsequent periods of US monetary policy normalization after quantitative easing during COVID-19, global financial markets have encountered elevated levels of volatility and risk. In response, investors have increasingly sought out unconventional financial assets, such as Bitcoin, to mitigate exposure and enhance portfolio diversification. This study utilizes a Dynamic Conditional Correlation (DCC) Multivariate GARCH model, specifically employing the GARCH (1,1) specification, to analyze the relationship between stock markets index of major countries and cryptocurrency, with a particular focus on Bitcoin. The results indicate statistically significant correlations between Bitcoin and stock market returns in several countries during the COVID-19 period. Volatility appears to be influenced by historical stock market performance during both the pandemic and the subsequent normalization of monetary policy. Furthermore, the DCC-GARCH models reveal low significant coefficients for ASEAN stock market indices before and during the COVID-19 pandemic, indicating that these markets may have displaced Bitcoin as a hedge asset. In contrast, stock market indices in America and Europe consistently show statistical significance across all periods, suggesting that Bitcoin’s role as a hedge in these regions is limited. In contrast, gold clearly demonstrated safe haven properties before the COVID-19 pandemic which a characteristic had not been observed for Bitcoin. However, gold has emerged as a safe haven for only ASEAN stock markets since the U.S. initial 0.25% interest rate hike.

A Bibliometric analysis of literature on hedge and safe haven assets

ABSTRACTWe conduct a meta‐literature review of safe haven and hedge assets covering 617 papers published in 170 sources from 1996 to 2022 based on the Scopus database. This review includes a qualitative analysis of the bibliometric content and a quantitative analysis of the citations to identify the primary research streams and offer future research directions. The analysis identifies four research streams in the hedge and safe haven literature: (1) Gold as a hedge and safe haven asset; (2) various models estimating the hedge and safe haven ability of potential assets such as precious metals, crude oil, and cryptocurrencies; (3) Bitcoin as a safe haven asset; and (4) the role of various safe haven assets, particularly Gold and Bitcoin, during the COVID‐19 crisis. The meta‐review also classifies the most influential authors focusing on hedging and safe haven research through co‐authorship and collaborative network analysis. Finally, future research directions are formulated with a wide set of potential research questions and areas. The outcomes of this meta‐review study are useful for researchers, financial analysts, and investors searching for the best safe haven assets during unfavorable market conditions.

Systemic risk-sharing between natural gas, oil, and stock markets in top energy producer and consumer countries

This study investigates the dependence and risk spillovers in the short-, medium- and long-terms between natural gas (NG), crude oil and stock markets of top energy producer countries (Russia, Ukraine, and US) and consumer countries (China, India, and EU members). Using the wavelet coherence approach, the results show a long-term dependence between NG and all stock markets between 2006 and 2022. Low and intermediate frequency co-movements of oil with stock markets are more pronounced among top energy producers than top energy consumers (except the EU). Further, there is heterogeneous dependence between stock markets and both NG and oil. Moreover, the dependence is positive and high for oil, and negative for NG, irrespective of the time horizon. NG is a hedge asset in the short-, medium- and long-terms for investors in top energy producer and consumer countries. Oil is a diversifier asset in the long term and a weak hedge asset in both short- and long-terms. We find evidence of significant bidirectional and asymmetric spillovers of NG, oil, and stock markets. The upside and downside risk spillovers for both NG and oil are higher in the long term than in the short- and medium-terms. NG sends more risk to stock markets than oil does in the long term, particularly in Russia. Our findings have significant implications for financial risk assessments and stock market stability.

Risk Management and Different Financial Approaches to Reduce Business Risk

This article examines three different risk management methods: asset hedging by shorting stocks, cash flow hedging using forward contracts, and futures contracts. The article explains each method's rationale, application, advantages, and disadvantages. By presenting and explaining these methods, this study aims to help readers gain insights into their effectiveness in managing risk in different types of transactions. The content of the article supports the readers to have a better understanding and gives some strategies for risk management, and provides guidance for decision-makers to mitigate potential risks in their financial operations. Asset hedging by shorting stocks involves selling borrowed stocks in anticipation of a decline in their price, thereby offsetting the potential loss of a declining asset. This strategy allows an investor to profit from a decline in stock prices. Cash flow hedging through forward contracts involves entering into an agreement to buy or sell an asset at a pre-determined future price, thereby reducing the risk of adverse price movements and ensuring a stable cash flow. On the other hand, futures contracts are standardized agreements to buy or sell an asset at a future date, are traded on public markets, provide legal protection for both parties through financial intermediaries, and allow investors to lock in prices. While these risk management methods have obvious advantages, such as potential gains to offset the risk of asset depreciation during market downturns, protection against adverse price movements, and price stabilization, they also have inherent risks and limitations that need to be carefully considered.

CARBON RISK HEDGING: REDUCING PORTFOLIO CARBON RISK USING A BETA HEDGE RATIO

In response to the global transition to a low-carbon economy, carbon risk reduction in diversified portfolios has become imperative. We develop a new hedge approach to mitigate carbon risk, quantified as the carbon beta using a multi-factor model. By calculating a novel hedge ratio, investors are provided with an optimal allocation to a hedge asset, facilitating the effective reduction of carbon beta within their portfolios. Our findings highlight the effectiveness of this approach, which leads to carbon beta reductions without significant losses in risk-adjusted returns, implying that investors and fund managers can adopt this hedge strategy to moderate their carbon risk exposure. Compared to other carbon risk hedge methods, our approach only requires an investment in one more asset, making real-world applications relatively straightforward.

Examining the hedge performance of US dollar, VIX, and gold during the coronavirus pandemic: Is US dollar a better hedge asset?

This study utilizes the hedging potential of the U.S. Dollar Index (USDX) during the COVID-19 period, specifically comparing its positive effects on optimal portfolio weights and hedging ratios with those of traditional hedging assets, such as the VIX and gold. The scalar BEKK GARCH model is employed to forecast volatility and calculate hedging indicators. The results show that USDX exhibits strong hedging abilities against S&P 500 index volatility. These findings highlight the advantageous role of the USDX as a hedging instrument, particularly during periods of heightened market uncertainty, such as during the COVID-19 crisis. Despite the increased market volatility during the COVID-19 pandemic, the value of the optimal portfolio weights is stable and the volatility of the weights is significantly reduced, demonstrating the strength of the USDX's low risk and volatility in hedging against market fluctuations. Moreover, the increase in the hedge ratio indicates that more capital is allocated to hedging, reflecting the increased correlation between the USDX and S&P 500 index. These results emphasize the beneficial role of the USDX as a hedging instrument during times of elevated market uncertainty, such as during the COVID-19 crisis. Ultimately, USDX can provide valuable insights for market participants seeking effective hedging strategies.

The safe haven, hedging, and diversification properties of oil, gold, and cryptocurrency for the G7 equity markets: Evidence from the pre- and post-COVID-19 periods

This study investigates the safe haven, hedging, and diversification properties of oil, gold, and two cryptocurrencies, including Bitcoin and Ethereum, for equity investments in the G7 economies under different market conditions. Daily data covering the pre- and post-COVID-19 periods were employed, using the linear and nonlinear Generalized Autoregressive Conditional Heteroskedasticity models. The empirical evidence supports gold as an undisputable diversifier for equity investments in the G7 equity markets under all market conditions. Cryptocurrencies have a valuable safe-haven potential, particularly during the COVID-19 crisis. Furthermore, the suitability of the optimal hedge asset depends on market conditions and individual countries, where the traditional assets present the best hedge in the normal conditions, compared to the modern assets. However, in the stress periods, Bitcoin presents the best hedge for the stocks of the G7 European and the UK countries, although Ethereum is the optimal hedge for the U.S. and Canada. In contrast, oil exhibits a superiority in hedging Japanese equities during all market conditions.

Exploring the time‐frequency connectedness among non‐fungible tokens and developed stock markets

SummaryIn this paper, we examine the connectedness between volatilities for various non‐fungible tokens (NFTs) and developed stock markets during the period from July 1, 2018, to June 15, 2022. With the use of the time‐varying connectedness methods to explore the volatility interdependences among these assets, we find that there is a significant volatility connectedness during Russia's invasion of Ukraine and COVID‐19 periods. Evidence emerging from this study advocates the inclusion of NFTs in developed stock markets for medium and long time periods only. The results also suggest that UK and Germany stock markets are the predominant market of spillover transmission, whereas the XTZ is the top net recipient/transmitter of volatility connectedness shocks. Moreover, Chinese stock market and ENJ offer more diversification gains than others, and the volatility connectedness from US stock market to NFTs is more pronounced in the long‐term than the short‐term. Our research provides some urgent and prominent insights to help investors and policymakers to be aware that NFTs are important hedge assets that should be added to stock portfolios during periods of geopolitical stability and in the post‐pandemic times.

How does COVID-19 affect the spillover effects of green finance, carbon markets, and renewable/non-renewable energy markets? Evidence from China

COVID-19 brings new challenges to addressing climate change and achieving the goal of environmental sustainability. This paper examines how the COVID-19 pandemic affects transmission of returns spillovers among green finance, carbon market and renewable & non-renewable energy in China. We evaluate the dynamic and directional risk connectedness across time and at various frequency bands using Diebold and Yilmaz and Baruník and Křehlík approaches. First, the total spillover effects increase significantly when the COVID-19 outbreak. Second, the carbon price fluctuations are mainly influenced by non-renewable energy. Third, the spillover effect is mainly acted in the short term, meaning that it is strongly influenced by investor sentiment in the short term. Fourth, non-renewable energy and carbon markets are the main net recipients and can be used as hedge assets. Finally, the total spillover is time-varying that is affected by the unexpected crisis. The findings will help policymakers and environmental investors to develop policy measures and portfolios that are appropriate for different frequency domains.

The Hedging Ability of Gold, Silver and Bitcoin against Inflation in ASEAN Countries

This paper examines the hedging ability of gold, silver, and Bitcoin against inflation in ASEAN countries. The inclusion of Bitcoin as a hedge is relatively new in literature and the effect of hedging has been exacerbated post Global Financial Crisis, when the prices of precious metals have increased continuously. To serve that objective, the student-t EGARCH (1,1) model is first used to study the relationship between average asset return and inflation and next a quantile regression model is applied to explore the relationship between different quantiles of asset return and inflation. This ensures the hedging potential of each asset to be equally strong in bearish and bullish conditions. The tests show that the results from student-t EGARCH (1,1) model and quantile regression model are different while the results pre and post GFC are similar in most of the cases. The quantile regression model, which accounts for different quantiles for asset returns, indicates that gold, silver, and Bitcoin appear to be a hedge and safe haven in ASEAN countries. However, from the student-t EGARCH (1,1) model, which accounts for average asset returns, Bitcoin is a hedge asset but none of the three assets serves as a safe haven in ASEAN countries.

Shock transmission between crude oil prices and stock markets

This paper investigates the connectedness between crude oil prices and several financial stock markets from January 2000 to February 2023, applying a Dynamic Conditional Correlation Skew Student Copula model and the connectedness index by Diebold and Yilmaz (2012). The Kendall’s Tau correlation findings show that prior to the Global Finance Crisis, equity markets were less linked to BRENT than after the crisis, likely because of economic growth reducing the importance of oil prices. However, from late 2008 to 2023, global uncertainty due to various crises and conflicts led to greater correlation among oil prices and major equity indices. Importing countries showed negative pairwise dependence with BRENT more frequently than exporting countries, which can be attributed to their economic structure and dependence on oil. Thus, BRENT can serve as a hedge asset for equity investments in importing countries and just as a diversifier for exporting countries due to its weak negative correlation. Additionally, stock markets within oil-exporting countries, such as Norway (OSEAX) or Russia (RTS), are net receivers. The study concludes with a detailed analysis of connectedness in terms of the returns and volatility among crude oil prices and stock markets not only during different political and financial events but also in the aftermath of natural disasters that have affected the interdependencies between them. The results prove that the occurrences that influence the correlation between stock markets and BRENT do not have such a significant impact, but the spillover effect of these events dissolves at a leisurely pace. The findings of this study clearly show implications for various market participants, policymakers, and portfolio managers.

Time-varying market efficiency of safe-haven assets

This study investigates the hedge and safe-haven possibilities with bitcoin, gold and crude oil in different equity markets in the presence of time-varying market inefficiency. Our results indicate that periods of market inefficiency for the Bitcoin, gold and crude oil price positively influence their function as a hedge asset for the equity markets of Japan, China, the US, Europe and emerging countries. In addition to contributing to the discussion on the factors which affect the functioning of safe-haven assets, the empirical findings of this study further highlight the importance of market efficiency as a market microstructure feature. These results have important implications for investors seeking to manage risk through diversification across different asset classes.

Are Bitcoin and Gold a Safe Haven during COVID-19 and the 2022 Russia–Ukraine War?

Our investigation strives to unearth the best portfolio hedging strategy for the G7 stock indices through Bitcoin and gold using daily data relevant to the period 2 January 2016 to 5 January 2023. This study uses the DVECH-GARCH model to model dynamic correlation and then compute optimal hedge ratios and hedging effectiveness. The empirical findings show that Bitcoin and gold were rather effective hedge assets before COVID-19 and diversifiers during the pandemic and Russia–Ukraine war. From hedging effectiveness perspectives, gold and Bitcoin are safe-haven assets, and the investment risk of G7 stock indices could be hedged by taking a short position during thepandemic period and war except for the pair Nikkei/Gold. Additionally, gold beats Bitcoin in terms of hedging efficiency. We thus demonstrate the central role of Bitcoin and gold as financial market participants, particularly during market turmoil and downward movements. Our findings can be of interest to investors, regulators, and governments to take into consideration the role of Bitcoin in financial markets.

Is Bitcoin the 'Digit Gold'A Potential Safe-haven Asset?

In this paper, we examine whether bitcoin has the potential to become safe-haven asset that can rival gold in the future. We observed, compared and analyzed and the performance of bitcoin and gold in face of a falling market and inflation pressure. We can see if investors can rely on bitcoin to reduce risk exposure significantly through empirical tests. At the end of our research, we found that bitcoin did not perform as well as gold did when faced with market crash and inflation. Therefore, we conclude that bitcoin does not yet show the potential to possess risk-proof merits as gold, the traditional high-quality hedge asset. Gold would probably remain the preferred hedge asset against cryptocurrency for now.

Is Bitcoin a Safe Haven for US Equity Market? --A Comparison with Gold and the Dollar

This paper examines whether Bitcoin is an excellent hedge asset by applying the GARCH model. First, the correlation test finds that bitcoin's returns against the US dollar and gold are not significantly correlated. Also, based on comparisons across events, bitcoin returns perform more neutrally, unlike traditional hedges such as gold, which exhibit a significant negative correlation between performance and hedge in an emergency. In addition, the high volatility of Bitcoin compared to other varieties suggests that investors choosing to invest in Bitcoin will expose to high-risk return volatility. Therefore, bitcoin is more of a speculative asset than a safe haven.

Re-evaluating the hedge and safe-haven properties of Islamic indexes, gold and Bitcoin: evidence from DCC–GARCH and quantile models

PurposeThis paper aims to investigate the hedge, safe-haven and diversifier properties of Islamic indexes, Bitcoin and gold for ten of the most affected countries by the coronavirus, which are the USA, Brazil, the UK, Italy, Spain, Germany, France, Russia, China and Malaysia.Design/methodology/approachThis research uses the Ratner and Chiu (2013) methodology based on the dynamic conditional correlation models to improve Baur and McDermott (2010). The authors adopt a careful investigation of the features of a diversifier, hedge and safe haven using the dynamic conditional correlation–GARCH and quantile regression models.FindingsEmpirical results indicate that Islamic indexes are not considered as hedge assets for the conventional market for all studied countries during the COVID-19 pandemic crisis period. However, gold works as a strong hedge in all countries, except for Brazil and Malaysia. Bitcoin is a strong hedge in the USA and a strong hedge and safe haven in China.Practical implicationsInternational investors in China and the US stock markets should replace Islamic ‎indexes with Bitcoin in their conventional portfolio of securities during the pandemic.Originality/valueTo the best of the authors’ knowledge, this is the first paper that re-evaluates the hedge, safe-haven and diversifier properties of Islamic indexes, Bitcoin and gold for ten of the most affected countries by the coronavirus.

How does the crisis of the COVID-19 pandemic affect the interactions between the stock, oil, gold, currency, and cryptocurrency markets?

C52; C53; G15.

In search of hedges and safe havens during the COVID─19 pandemic: Gold versus Bitcoin, oil, and oil uncertainty

This paper investigates the potential hedging and safe-haven properties of several alternative investment assets, including gold, Bitcoin, oil, and the oil price volatility index (OVX), against the risks of the Saudi stock market and its constituent sectors in different phases of the COVID19 pandemic. Using daily data, we employ the bivariate dynamic conditional correlation-generalized autoregressive conditional heteroskedasticity (DCCGARCH) technique to model volatilities and conditional correlations. Our findings show that all investigated alternative investment assets had a time-varying hedging role in the Saudi stock market, which became expensive during the early stages of the COVID19 pandemic. Our results also show that the optimal weights for gold were substantially higher than those of other assets, reaching a peak during the pandemic, implying that investors consider gold a flight-to-safety asset. Additionally, we find that gold and OVX were strong hedges and could have served as weak safe havens for investors during the early stages of the COVID19 pandemic, while the remaining assets generally lacked these properties and could be merely used as diversifiers. Our empirical findings offer several key implications for policymakers and portfolio managers in Saudi Arabia that may be applicable to similar markets. In particular, we show that OVX-based products can serve as a promising hedging asset for stock markets in oil-exporting countries.

Extreme quantile connectedness and spillovers between oil and Vietnamese stock markets: a sectoral analysis

PurposeThis study examines the extreme quantile connectedness and spillovers between West Texas Intermediate (WTI) crude oil futures and ten Vietnamese stock market sectors. Knowledge of such links is important to both investors and policymakers in understanding the transmission of shocks across markets.Design/methodology/approachThe authors employ the extreme quantile connectedness methodology of Ando et al. (2022).FindingsInitial results show that the size of spillovers is higher during bearish markets than bullish markets and under major financial, political, energy and pandemic events. The oil market is a net receiver of spillovers during downward markets and net contributors during upward markets. The banking sector is a net contributor of spillovers, whereas consumer discretionary and consumer staples are net receivers for different quantiles. The role of the remaining sectors as net receivers/contributors is sensitive to the quantiles. Oil has a large spillover effect on the electricity sector for all quantiles. Comparing all crises, oil offers the best hedging effectiveness to the Vietnamese sector during the coronavirus disease 2019 (COVID-19) crisis. Moreover, oil was a cheap hedge asset during oil crises. Finally, oil provides the highest hedging effectiveness for healthcare during the global financial crisis (GFC) and consumer staples during the European debt crisis (EDC), oil crisis and COVID-19.Originality/valueAcknowledging the presence of heterogeneity in the relation between oil and economic sectors under different market conditions, this study is the first to examine the extreme quantile connectedness between oil and Vietnamese sectors.