Spillovers and bivariate portfolios of gold-backed cryptocurrencies and gold during the COVID-19 outbreak

Abstract

Purpose This paper aims to analyze the time-varying connectedness of gold-backed cryptocurrencies and gold. This study determines the volatility spillovers in these two asset classes and the performance of bivariate portfolios based on net pairwise spillovers. Design/methodology/approach This research uses two Islamic and four conventional gold-backed cryptocurrencies and gold as variables. GJR-GARCH method under corrected DCC (cDCC) of Aielli (2013) evaluates the dynamic connectedness. Additionally, the spillovers are created using the dynamic connectedness of Diebold and Yilmaz (2012). A network-based spillover of Diebold and Yılmaz, (2014) is also made. A dynamic optimal weights strategy optimized with DCC-t-Copula determines bivariate portfolios’ performances. In general, there are 21 bivariate portfolios. Findings The outbreak of COVID-19 increases the dynamic connectedness of gold and gold-backed cryptocurrencies, which indicates a contagion effect. The results show that gold is the net volatility receiver during the COVID-19 pandemic. Moreover, a portfolio composed of gold and gold-backed cryptocurrency provides high profitability performance but zero hedge effectiveness under optimal weights strategy. Practical implications According to bivariate portfolios based on net pairwise spillovers, gold-backed cryptocurrencies' investors should not add gold to their portfolio during the pandemic because it is a net receiver of risk from the cryptocurrencies. Originality/value To the best of the author’s knowledge, this is the first paper to create bivariate portfolios composed of gold-backed cryptocurrencies and their underlying asset using DCC-t-Copula.

Fintech in islamic finance literature: A review

“…Likewise, Lahmiri & Bekiros (2019) reported that green and Islamic cryptocurrencies showed anti-persistence in their returns while the volume, prices, and volatility exhibit a higher pertinence dynamic than its counterpart. During economic meltdown due to COVID-19 (Nugroho, 2021), Islamic gold-backed cryptocurrency (GC-gold) has shown better performance than conventional GC-gold, which is indicated by the resistance of Islamic GC-gold to COVID-19's impact. Moreover, Chkili et al (2021) found that bitcoin provides a safer asset for investors during economic downturns than Islamic stock.…”

“…Hence, the result might not be robust. (Nugroho, 2021) This study examines volatility spillover between gold-backed cryptocurrencies and gold, particularly during COVID-19.…”

Regime specific spillover between Dow Jones Islamic Market World Index, Islamic gold-backed crypto currencies and the blockchain halal index

“…Finally, the analysis of hedging effectiveness suggests that investors can reduce the risk of Islamic sectorial equity portfolios by adding the Islamic Sharia-based cryptocurrencies. Nugroho (2021) reports that the dynamic spillover between gold and gold-backed cryptocurrencies has been increased during COVID-19 pandemic. Moreover, the gold is the net volatility receiver during the same period.…”

“…Hence, several works have studied the phenomenon of volatility transmission between commodities, Islamic and conventional stocks and cryptocurrencies markets (Abbes and Trichilli, 2015; Yi et al , 2018; Trichilli et al , 2018; Trichilli et al , 2020; Catania and Sandholdt, 2019; Mensi et al , 2020; Trichilli and Boujelbène Abbes, 2022). There are also several studies that examine the contagion risks and spillover effects in conventional and Islamic gold-backed cryptocurrencies markets as the studies of Yousaf and Yarovaya (2021) and Nugroho (2021).…”

The best-fitting model(s) of equal risk contribution: evidence from environmental-friendly portfolio

“…Green bonds could act as a safe haven during the outbreak (Hacı€ omero glu et al, 2021). Similarly, the green bond market was also more efficient during the epidemic, demonstrating that green bonds can act as a good diversifier for stock investors during market turmoil (Arif Model Functional forms Abbreviation DCC-t-Copula (Antonakakis et al, 2020;Nugroho, 2021b;Patton, 2006) x…”