Asymmetric correlation and hedging effectiveness of gold & cryptocurrencies: From pre-industrial to the 4th industrial revolution.

Asymmetric correlation and hedging effectiveness of gold & cryptocurrencies: From pre-industrial to the 4th industrial revolution.

Thampanya, Natthinee;Nasir, Muhammad Ali;Huynh, Toan Luu Duc;
technological forecasting and social change 2020 Vol. 159 pp. 120195
206
thampanya2020asymmetrictechnological

Abstract

This paper examines the long-run and short-run asymmetric effects of gold and cryptocurrency returns on the Thai stock market. Employing daily data on gold prices from 2000 to 2019 and on cryptocurrency (Bitcoin) from 2013 to 2019 in a linear and non-linear Autoregressive Distributed Lag (ARDL) framework, we investigate and contrast the hedging effectiveness of gold and bitcoins for equities. This study also evaluates whether hedging potential of gold or cryptocurrency remains equally strong in bearish and bullish conditions of the stock market. Our key findings on stock and gold returns reveal that the effects of gold on the stock market are asymmetric in most of the cases. Negative asymmetry is more likely to occur regardless of stock market conditions. On the other hand, there is very limited evidence showing the meaningful effect of cryptocurrency. The robustness of the ARDL bounds test of co-integration provides evidence for a strong long-run relationship in all cases. Contrary to the existing literature, our results suggest that neither gold nor cryptocurrency acts as a good instrument for hedging in the stock market. Correlations between stock/gold and stock/cryptocurrency pairs are found to be positive in most cases. Our findings imply that adding gold or cryptocurrency to a stock portfolio does not enhance its risk-adjusted return.

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