Could Stock Hedge Bitcoin Risk(s) and Vice Versa?

Abstract

This paper is saddled with the task of investigating the Bitcoin market behaviour in the presence of a government risk. This is because both the institutional and retail investors' interests in the Bitcoin market is growing rapidly. Conversely, the seemingly unregulated nature of this market is a serious concern to most economies and results to the placement of ban on Initial Coin Offering (ICO) in some economies by the government. Daily series of return and volume within the window of the ICO ban in China was used for the Bitcoin market and S&P500 stock market to examine the effect of a government risk in the Bitcoin market and possible hedging capabilities. Empirical results show that the ban dampened Bitcoin returns and the returns from each market can predict the other. The Exogenous Dynamic Conditional Correlation (Exo-DCC) model result suggests that, yes! the S&P500 stocks is capable of hedging Bitcoin risk while Bitcoin can also hedge S&P500 stocks risks and vice versa. The Exogenous BEKK (Exo-BEKK) model result shows evidence of bidirectional volatility spill over between the two markets studied. In practice, investors (institutions and retailers) can comfortably form a robust investment portfolio with (at least) these two assets and develop a hedging strategy such that the impacts of risks on the portfolio's returns are safely hedged.

Keywords: Risk Management, Hedging, Return, Volatility, Bitcoin, Stock

JEL Classification: D81, G12, G32, R53