Is Bitcoin a Hedge? How Extreme Volatility Can Destroy the Hedge Property

27 Pages Posted: 20 Sep 2021 Last revised: 22 Jan 2022

See all articles by Dirk G. Baur

Dirk G. Baur

University of Western Australia - Business School; Financial Research Network (FIRN)

Lai T. Hoang

The University of Western Australia

Md Zakir Hossain

The University of Western Australia

Date Written: September 18, 2021

Abstract

A large literature tests whether Bitcoin can hedge portfolio risk, i.e. reduce the risk if added to a portfolio. Intuitively, given the extreme volatility and thus risk of Bitcoin and cryptocurrencies, the idea that Bitcoin is a hedge may be puzzling. Indeed, we show that for extreme levels of volatility, Bitcoin does not reduce the risk if added to a benchmark equity portfolio. This is not only true on average but also holds for sub-samples, including the COVID-19 crisis period. We conclude that a focus on correlations is not sufficient for extreme levels of volatility.

Keywords: Bitcoin, hedge, portfolio diversifier

JEL Classification: G00, G10, G11

Suggested Citation

Baur, Dirk G. and Hoang, Lai T. and Hossain, Md Zakir, Is Bitcoin a Hedge? How Extreme Volatility Can Destroy the Hedge Property (September 18, 2021). Finance Research Letters, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3925888 or http://dx.doi.org/10.2139/ssrn.3925888

Dirk G. Baur (Contact Author)

University of Western Australia - Business School ( email )

School of Business
35 Stirling Highway
Crawley, Western Australia 6009
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Lai T. Hoang

The University of Western Australia ( email )

35 Stirling Highway
Crawley, Western Australia 6009
Australia

Md Zakir Hossain

The University of Western Australia ( email )

School of Business
35 Stirling Highway
Crawley, WA Western Australia 6009
Australia
(+61 8) 6488 2780 (Phone)

HOME PAGE: http://www.business.uwa.edu.au/

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