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      Can fiat currencies really hedge Bitcoin? Evidence from dynamic short-term perspective

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          Abstract

          Whereas much research has largely investigated the safe haven, diversifier and hedge proprieties of cryptocurrency, very few papers have analyzed the hedging issue of cryptocurrency with other assets. As such, this paper attempts to investigate the possibility if Bitcoin can be hedged by selected fiat currencies (EUR, JPY and GBP) as Bitcoin prices have experienced high and persistent volatility. To do so, we compute optimal hedge ratios between Bitcoin and fiat currencies over the period 02/02/2012–30/11/2017 based on the VAR-DCC-GARCH model, VAR-ADCC-GARCH model and VAR-component GARCH-DCC model. A rolling window analysis is employed to establish out-of-sample one-step-ahead forecasts of dynamic conditional correlations between different assets. This leads to establish time-varying hedge ratios and thus dynamic cross-hedging Bitcoin/fiat currency markets. The empirical results clearly show the time-varying correlations between Bitcoin and fiat currencies under different specifications, implying a dynamic behavior of the relationship between such assets. For all the proposed models, such dynamic correlations are rather characterized by trending downward over the period under study. The results also display time-varying hedge ratios which lead to an ongoing regular demand for rebalancing the hedged positions under different specifications. As a matter of fact, using various models which take into account different aspects of volatility and correlation structures allows to better implement dynamic hedging strategies.

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          Most cited references43

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          Dynamic Conditional Correlation

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            On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks

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              On the hedge and safe haven properties of Bitcoin: Is it really more than a diversifier?

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                Author and article information

                Contributors
                jihed.majdoub@gmail.com
                salimbensassi@yahoo.fr
                bjaouiazza2@yahoo.fr
                Journal
                Decisions Econ Finan
                Decisions in Economics and Finance
                Springer International Publishing (Cham )
                1593-8883
                1129-6569
                6 January 2021
                : 1-28
                Affiliations
                [1 ]GRID grid.265234.4, ISNI 0000 0001 2177 9066, High Institute of Management, , University of Tunis, ; 2000 Le Bardo, Tunisia
                [2 ]GRID grid.12574.35, ISNI 0000000122959819, LAREQUAD FSEG of Tunis, , University of Tunis El Manar, ; Tunis, Tunisia
                Article
                314
                10.1007/s10203-020-00314-7
                7786886
                5a0fe82a-ce46-4727-bf09-cad1b466a732
                © Associazione per la Matematica Applicata alle Scienze Economiche e Sociali (AMASES) 2021

                This article is made available via the PMC Open Access Subset for unrestricted research re-use and secondary analysis in any form or by any means with acknowledgement of the original source. These permissions are granted for the duration of the World Health Organization (WHO) declaration of COVID-19 as a global pandemic.

                History
                : 26 December 2019
                : 23 November 2020
                Categories
                Article

                bitcoin,fiat currency,hedging,portfolio strategies,dynamic perspective,risk management,garch-type models,g11,g15,c22

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