“…Gold has been regarded as a safe haven during market turmoil and it is one of the most sought-after assets in a market downturn as investors experience a flight-to-liquidity (Liu, 2020). The evidence by Ghabri et al (2020) and Scharnowski (2021) suggests that adding bitcoin to a portfolio offers undeniable diversification benefits of liquidity risk because different assets generate different liquidity at a time. Al Janabi et al (2019) argue that gold and bitcoin improve the risk-return performance of stock portfolios when using liquidity-adjusted value-at-risk optimization.…”
Purpose
This study aims to provide empirical evidence on the return and volatility spillover effects between Southeast Asian stock markets, bitcoin and gold in the periods before and during the COVID-19 pandemic. The interdependence among different asset classes, the two leading stock markets in Southeast Asia (Singapore and Thailand), bitcoin and gold, is analyzed for diversification opportunities.
Design/methodology/approach
The vector autoregressive-Baba, Engle, Kraft, and Kroner-generalized autoregressive conditional heteroskedasticity model is used to capture the return and volatility spillover effects between different financial assets. The data cover the period from October 2013 to May 2021. The full period is divided into two sub-sample periods, the pre-pandemic period and the during-pandemic period, to examine whether the financial turbulence caused by COVID-19 affects the interconnectedness between the assets.
Findings
The stocks in Southeast Asia, bitcoin and gold become more interdependent during the pandemic. During turbulent times, the contagion effect is inevitable regardless of region and asset class. Furthermore, bitcoin does not provide protection for investors in Southeast Asia. The pricing mechanism and technology behind bitcoin are different from common stocks, yet the results indicate the co-movement of bitcoin and the Singaporean and Thai stocks during the crisis. Finally, risk-averse investors should ensure that gold constitutes a significant proportion of their portfolio, approximately 40%–55%. This strategy provides the most effective hedge against risk.
Originality/value
The mean return and volatility spillover is analyzed between bitcoin, gold and two preeminent stock markets in Southeast Asia. Most prior studies test the spillover effect between the same asset classes such as equities in different regions or different commodities, currencies and cryptocurrencies. Moreover, the time-series data are divided into two groups based on the structural break caused by the COVID-19 pandemic. The findings of this study offer practical implications for risk management and portfolio diversification. Diversification opportunities are becoming scarce as different financial assets witness increasing integration.
“…Gold has been regarded as a safe haven during market turmoil and it is one of the most sought-after assets in a market downturn as investors experience a flight-to-liquidity (Liu, 2020). The evidence by Ghabri et al (2020) and Scharnowski (2021) suggests that adding bitcoin to a portfolio offers undeniable diversification benefits of liquidity risk because different assets generate different liquidity at a time. Al Janabi et al (2019) argue that gold and bitcoin improve the risk-return performance of stock portfolios when using liquidity-adjusted value-at-risk optimization.…”
Purpose
This study aims to provide empirical evidence on the return and volatility spillover effects between Southeast Asian stock markets, bitcoin and gold in the periods before and during the COVID-19 pandemic. The interdependence among different asset classes, the two leading stock markets in Southeast Asia (Singapore and Thailand), bitcoin and gold, is analyzed for diversification opportunities.
Design/methodology/approach
The vector autoregressive-Baba, Engle, Kraft, and Kroner-generalized autoregressive conditional heteroskedasticity model is used to capture the return and volatility spillover effects between different financial assets. The data cover the period from October 2013 to May 2021. The full period is divided into two sub-sample periods, the pre-pandemic period and the during-pandemic period, to examine whether the financial turbulence caused by COVID-19 affects the interconnectedness between the assets.
Findings
The stocks in Southeast Asia, bitcoin and gold become more interdependent during the pandemic. During turbulent times, the contagion effect is inevitable regardless of region and asset class. Furthermore, bitcoin does not provide protection for investors in Southeast Asia. The pricing mechanism and technology behind bitcoin are different from common stocks, yet the results indicate the co-movement of bitcoin and the Singaporean and Thai stocks during the crisis. Finally, risk-averse investors should ensure that gold constitutes a significant proportion of their portfolio, approximately 40%–55%. This strategy provides the most effective hedge against risk.
Originality/value
The mean return and volatility spillover is analyzed between bitcoin, gold and two preeminent stock markets in Southeast Asia. Most prior studies test the spillover effect between the same asset classes such as equities in different regions or different commodities, currencies and cryptocurrencies. Moreover, the time-series data are divided into two groups based on the structural break caused by the COVID-19 pandemic. The findings of this study offer practical implications for risk management and portfolio diversification. Diversification opportunities are becoming scarce as different financial assets witness increasing integration.
“…We must formalize that we observe a remarkable similarity in the dynamics of cryptocurrencies, considering their stability in the periods before and during COVID-19. It suggests that these cryptocurrencies are financial assets that should be regarded for liquidity risk diversification [36] , [37] . Fig.…”
“…This weakness has been confirmed by Conlon et al [68] in the COVID-19 crisis; Bitcoin's extreme volatility hinders its usefulness as a safe haven and even motivates that, paradoxically, it needs a stable coin as the Tether to cover itself [68]. In any case, studies such as that of Brieri et al [65] show that a small weighting of Bitcoin can improve the risk-return trade-off of well-diversified portfolios; and others such as that of Ghabri et al [69] observe that Bitcoin can lower the liquidity risk in the portfolio, under the Mean-Variance-Liquidity framework.…”
Since the launch of Bitcoin, there has been a lot of controversy surrounding what asset class it is. Several authors recognize the potential of cryptocurrencies but also certain deviations with respect to the functions of a conventional currency. Instead, Bitcoin’s diversifying factor and its high return potential have generated the attention of portfolio managers. In this context, understanding how its volatility is explained is a critical element of investor decision-making. By modeling the volatility of classic assets, nonlinear models such as Generalized Autoregressive Conditional Heteroskedasticity (GARCH) offer suitable results. Therefore, taking GARCH(1,1) as a reference point, the main aim of this study is to model and assess the relationship between the Bitcoin volatility and key financial environment variables through a Conditional Correlation (CC) Multivariate GARCH (MGARCH) approach. For this, several commodities, exchange rates, stock market indices, and company stocks linked to cryptocurrencies have been tested. The results obtained show certain heterogeneity in the fit of the different variables, highlighting the uncorrelation with respect to traditional safe haven assets such as gold and oil. Focusing on the CC-MGARCH model, a better behavior of the dynamic conditional correlation is found compared to the constant.
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