Can US Dollar Shine More Than Bitcoin Against the Downside Risk of Regional Equity Markets?

Abstract

Amidst heightened global uncertainties, increased financial contagions and fading diversification benefits, we examined and compared the hedge and safe-haven features of US Dollar and Bitcoin against the downside risk of regional stock indices of Asia, Pacific, Europe, and America. For the analysis purposes, we applied multifarious techniques, for instance, dynamic correlations, hedge ratios, hedging effectiveness and conditional diversification benefits for the period spanning January 2, 2012 to October 21, 2021. Overall, our analysis reveals that USD is a superior hedge and safe-haven asset, whereas Bitcoin is a good diversifier. Further, USD performs better in portfolios with European and American indices as compared with the Asian and Pacific indices. Meanwhile, the weight of USD required to attain maximum conditional diversification benefits greatly exceeds the Bitcoin’s weight needed in the case of all the regional indices. Our findings inform portfolio managers, currency traders and policymakers alike.

Keywords: USD index; Bitcoin; Conditional Diversification Benefits; Hedge; Safe-haven; Regional indices