Asymmetric Dynamic Correlations and Portfolio Management between Bitcoin and Stablecoins

Abstract

In this study, we document interesting properties of cryptoassets and empirically investigate the dynamic correlations between six major stablecoins and Bitcoin. It is evident that volatilities of Bitcoin and stablecoin returns exhibit asymmetric responses to good and bad news. We evaluate potential hedging benefits of cryptocurrencies for market participants and find that stablecoins are poor hedging products in most of the cases considered. Additionally, using the dynamic conditional correlation GJR-GARCH model, we show that Bitcoin exhibits larger diversification benefits than stablecoins during the COVID-19 pandemic. The evidence supports the idea that the leading cryptocurrency- Bitcoin can be suitable for portfolio diversification against stablecoins. These findings provide insightful information to cryptocurrency enthusiasts, investors and portfolio managers regarding optimal cryptoasset holdings, hedging, diversification, and risk aversion. In particular, our results provide timely implications for market participants whose crypto portfolios include stablecoins, especially after Terra’s collapse.

Keywords: Hedging strategy, DCC-GJR-GARCH model, Dollar-pegged stablecoins, FinTech