Cryptocurrency returns and economic policy uncertainty: A multicountry analysis using linear and quantile-based models

34 Pages Posted: 28 Apr 2020 Last revised: 28 May 2020

See all articles by Muhammad A. Cheema

Muhammad A. Cheema

University of Waikato New Zealand

Kenneth Szulczuk

Xiamen University Malaysia Campus

Elie Bouri

Université Saint Esprit de Kaslik (USEK)

Date Written: April 3, 2020

Abstract

In this paper, we examine whether the economic policy uncertainty (EPU) index can predict the cryptocurrency returns for countries with the highest number of Bitcoin nodes, which include U.S., Germany, France, Netherlands, Singapore, Canada, the UK, China, Russia, and Japan. To the extent cryptocurrencies are a speculative asset, we expect that an increase in EPU drives the prices of cryptocurrencies below fundamental values due to the flight to quality and that they subsequently correct. Therefore, we hypothesize that EPU is a positive predictor of cryptocurrency returns. Furthermore, we expect that the positive predictability of EPU is stronger in the long run than the short run since mispricing takes time to correct. Using ordinary least squares, multivariate augmented regression, and quantile regression, we find that EPU positively predicts cryptocurrency returns in the short run for subsequent 1-month returns. Moreover, we find stronger predictability of EPU for the subsequent returns over a longer horizon of 6- and 12-month than 1-month, which is again consistent with our hypothesis. Thus, cryptocurrencies might not act as a hedge or safe haven against other financial assets during uncertain times.

Keywords: Cryptocurrency; Return Predictability; Economic Policy Uncertainty Index; Safe Haven; Speculative Assets

JEL Classification: G02; G15; C32; D81

Suggested Citation

Cheema, Muhammad A. and Szulczuk, Kenneth and Bouri, Elie, Cryptocurrency returns and economic policy uncertainty: A multicountry analysis using linear and quantile-based models (April 3, 2020). Available at SSRN: https://ssrn.com/abstract=3567635 or http://dx.doi.org/10.2139/ssrn.3567635

Muhammad A. Cheema (Contact Author)

University of Waikato New Zealand ( email )

Hamilton, 3216
New Zealand

Kenneth Szulczuk

Xiamen University Malaysia Campus ( email )

Malaysia

Elie Bouri

Université Saint Esprit de Kaslik (USEK) ( email )

KASLIK
Lebanon

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