Is Bitcoin the New Digital Gold? Evidence From Extreme Price Movements in Financial Markets

57 Pages Posted: 26 Sep 2018 Last revised: 20 Jan 2019

See all articles by Konstantinos Gkillas

Konstantinos Gkillas

University of Patras - Business Administration

François Longin

ESSEC Business School

Date Written: January 18, 2019

Abstract

Is bitcoin the new digital gold? To answer this question, we investigate the potential benefits of bitcoin during extremely volatile periods. We use multivariate extreme value theory, which is the appropriate statistical approach to model the tail dependence structure. Considering first a position in equity markets, we find - similarly to previous studies - that the correlation of extreme returns increases during stock market crashes and decreases during stock market booms. Then, by combining each equity market with bitcoin, we find that the correlation of extreme returns sharply decreases during both market booms and crashes, indicating that bitcoin could provide the sought-after diversification benefits during turbulent times. A similar result is obtained for gold, confirming its well-recognized status of a safe haven when a crisis happens. Furthermore, we find a low extreme correlation between bitcoin and gold, which implies that both assets can be used together in times of turbulence in financial markets to protect equity positions. Such evidence indicates that bitcoin can be considered as the new digital gold. However, gold itself can still play an important role in portfolio risk management.

Keywords: bitcoin; diversification benefits; extreme correlation; extreme value theory; gold; portfolio risk management; tail dependence

JEL Classification: C46, F38, G01

Suggested Citation

Gkillas, Konstantinos and Longin, François, Is Bitcoin the New Digital Gold? Evidence From Extreme Price Movements in Financial Markets (January 18, 2019). Available at SSRN: https://ssrn.com/abstract=3245571 or http://dx.doi.org/10.2139/ssrn.3245571

Konstantinos Gkillas (Contact Author)

University of Patras - Business Administration ( email )

Patras
Greece

HOME PAGE: http://www.gillas.gr

François Longin

ESSEC Business School ( email )

Avenue Bernard Hirsch
BP 105 Cergy Cedex, 95021
France

HOME PAGE: http://www.essec.edu/faculty/francois-longin

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