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The Rise of Cryptocurrencies as an Investment Hedge. The Shift from Traditional Investment Hedges: Can Cryptocurrencies Replace Bonds as an Investment Hedge?

Thamrongsak, Nichawan LU and Varis, Mia LU (2021) NEKN02 20211
Department of Economics
Abstract (Swedish)
This thesis uses a dynamic conditional correlation (DCC) model to investigate the correlation between major cryptocurrencies, US government bonds and the S&P 500 and MSCI World indices in order to establish the hedge, safe haven and diversifier properties of cryptocurrencies. While US Treasuries have exhibited negative correlation and hedging properties against equity risk for decades, recent extreme market conditions have caused investors to look for alternative asset classes for hedging. Having experienced rapid market growth and increasing investor interest in the past few years, cryptocurrencies could provide a solution to hedging for when bonds are no longer able to protect against equity risk. Our empirical results, however, indicate... (More)
This thesis uses a dynamic conditional correlation (DCC) model to investigate the correlation between major cryptocurrencies, US government bonds and the S&P 500 and MSCI World indices in order to establish the hedge, safe haven and diversifier properties of cryptocurrencies. While US Treasuries have exhibited negative correlation and hedging properties against equity risk for decades, recent extreme market conditions have caused investors to look for alternative asset classes for hedging. Having experienced rapid market growth and increasing investor interest in the past few years, cryptocurrencies could provide a solution to hedging for when bonds are no longer able to protect against equity risk. Our empirical results, however, indicate that at present cryptocurrencies should only be considered as a complement rather than a substitute to bonds in an investment portfolio. While certain cryptocurrencies showed some hedging capabilities, most cryptocurrencies examined in this study only exhibited diversifier benefits. Although cryptocurrencies are therefore unlikely to fully replace bonds as a hedge at present, cryptocurrencies are a relatively new asset class with a demonstrated capability for growth and resilience, indicating immense potential for future development, especially in light of the creation of a new decentralized financial system and its impact on the economy in the years to follow. (Less)
Please use this url to cite or link to this publication:
author
Thamrongsak, Nichawan LU and Varis, Mia LU
supervisor
organization
course
NEKN02 20211
year
type
H1 - Master's Degree (One Year)
subject
keywords
Cryptocurrency, Hedging, DCC-GARCH, US Treasury Yields, S&P 500, MSCI World Index
language
English
id
9051630
date added to LUP
2021-10-26 08:18:28
date last changed
2021-10-26 08:18:28
@misc{9051630,
  abstract     = {{This thesis uses a dynamic conditional correlation (DCC) model to investigate the correlation between major cryptocurrencies, US government bonds and the S&P 500 and MSCI World indices in order to establish the hedge, safe haven and diversifier properties of cryptocurrencies. While US Treasuries have exhibited negative correlation and hedging properties against equity risk for decades, recent extreme market conditions have caused investors to look for alternative asset classes for hedging. Having experienced rapid market growth and increasing investor interest in the past few years, cryptocurrencies could provide a solution to hedging for when bonds are no longer able to protect against equity risk. Our empirical results, however, indicate that at present cryptocurrencies should only be considered as a complement rather than a substitute to bonds in an investment portfolio. While certain cryptocurrencies showed some hedging capabilities, most cryptocurrencies examined in this study only exhibited diversifier benefits. Although cryptocurrencies are therefore unlikely to fully replace bonds as a hedge at present, cryptocurrencies are a relatively new asset class with a demonstrated capability for growth and resilience, indicating immense potential for future development, especially in light of the creation of a new decentralized financial system and its impact on the economy in the years to follow.}},
  author       = {{Thamrongsak, Nichawan and Varis, Mia}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{The Rise of Cryptocurrencies as an Investment Hedge. The Shift from Traditional Investment Hedges: Can Cryptocurrencies Replace Bonds as an Investment Hedge?}},
  year         = {{2021}},
}