Bivariate Hedging Between Crypto-Currency And Traditional Assets

Abstract

Crypto-currency is distinct featured digital asset designed to work as decentralized asset, yet it has raised many questions and doubts about its definition and regulations. Keeping in view the increasing interest of masses in crypto-currencies the research is extended to examine the role of crypto-currency in diversification of investment. Bivariate analysis of crypto-currency market and other asset classes like gold, exchange rate, stock returns and government bonds has been observed among countries where crypto-currencies are being traded most frequently over 2013 to 2020. Theoretically the study intends to provide substantial support for risk management by using estimates like hedge ratio, VECM and BEKK GARCH. Practically the study aims to provide empirical justifications for investors, managers and policy makers to figure out exactly where crypto-currencies stand along with other asset classes, and what actually it brings to the financial system. It concludes that there is long term causal relationship running from traditional assets to crypto-currency market, co-movements are observed. The change in crypto-currency returns may not affect returns of traditional assets yet as any change in traditional assets may possibly upsurge towards change in crypto-currency market in the long term which indicates opportunities for crypto-currencies to hedge.