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Asymmetric effects of economic policy uncertainty on Bitcoin’s hedging power

Md Hakim Ali (Southampton Malaysia Business School, University of Southampton Malaysia, Iskandar Puteri, Malaysia)
Christophe Schinckus (School of Business, University of the Fraser Valley, Abbotsford, Canada)
Md Akther Uddin (Department of Business Administration, University of Creative Technology Chittagong, Chittagong, Bangladesh)
Saeed Pahlevansharif (Faculty of Business and Law, Taylor’s University, Subang Jaya, Malaysia)

Studies in Economics and Finance

ISSN: 1086-7376

Article publication date: 31 May 2022

Issue publication date: 20 February 2023

272

Abstract

Purpose

Even though Bitcoin has been often labelled as a safe haven asset class in the literature, the influence of economic policy uncertainty (EPU) on the diversifying opportunities offered by Bitcoin in relation to other assets needs to be investigated. This paper aims to investigate how the EPU affects diversification of commodity, conventional, Islamic and sustainable equity returns in relation to its impact on Bitcoin returns.

Design/methodology/approach

The authors use advanced time-series econometrics, namely, multivariate generalized autoregressive conditional heteroscedastic-dynamic conditional correlation and continuous wavelet transformation, for the analysis of the daily returns for the aforementioned assets between 01 August 2011 and 01 September 2019.

Findings

First, the authors found a strong evidence of Bitcoin’s mean reverting trend in the long run while its volatility has decreased significantly since 2013. After separating the EPU into two regimes (high and low), diversification opportunities with Bitcoin seems to disappear in a high EPU period, while the hedging opportunity tends to prevail in a low EPU period for all classes of assets. Importantly, the findings indicate that Bitcoin offers short-term diversification for sustainable and Islamic equity as well as energy stocks during a low uncertainty period. Consequently, in relation to the policy uncertainty, Bitcoin provides similar hedging opportunities than commodities like Gold and Silver. Overall, the study shows that EPU is remarkably important in explaining the average portfolio returns of Bitcoin, suggesting that this indicator can be perceived as a decent explanatory factor for portfolio diversification.

Originality/value

The study significantly extends the empirical literature of Bitcoin’s portfolio diversification by taking EPU into consideration. To the best of authors’ knowledge, this is one of the few studies to investigate the asymmetric effects of US EPU on Bitcoin’s hedging capabilities by taking into account major conventional equity, sustainable equity, Islamic equity, gold, silver and oil.

Keywords

Citation

Ali, M.H., Schinckus, C., Uddin, M.A. and Pahlevansharif, S. (2023), "Asymmetric effects of economic policy uncertainty on Bitcoin’s hedging power", Studies in Economics and Finance, Vol. 40 No. 2, pp. 213-229. https://doi.org/10.1108/SEF-05-2021-0186

Publisher

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Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

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