Investigating hedging capability of cryptocurrencies in the gold and stock markets in Iran

Articles in Press

Document Type : Research Paper

Authors

1 financial and risk engineering, Kashan branch, Islamic Azad University, Kashan, Iran

2 Accounting Faculty, Kashan branch, Islamic Azad University, Kashan, Iran

10.22059/frj.2024.364914.1007505

Abstract

Abstract:

Objective: Using cryptocurrencies for hedging the risk of various types of assets can be considered as a useful feature in cryptocurrencies investment. In recent years, investment in cryptocurrencies have become more common and many people have allocated a portion of their portfolio to cryptocurrencies. Knowing the behavior and capabilities of cryptocurrencies can help investors to better manage their investments. In this research, we have studies the capability of cryptocurrencies to hedge investment portfolio in Iran's economy. we wanted to see if crypto currencies can hedge investment in stock market and gold coins. Accordingly, we have selected tow popular cryptocurrencies i.e. Bitcoin and Ethereum to investigate their capability to hedge investment in the stock and gold markets in Iran.

Methods: In order to investigate the risk hedging of Iranian common investments using cryptocurrencies, daily data related to the Tehran Stock Exchange Index and the price of the Bahar Azadi gold coin have been used. Then, the daily return of gold coin and stocks index have been obtained in the 4-years period from March 2019 to the April 2023. Also, by using the exchange rate of the US dollar in free market, the daily price of mainly used cryptocurrencies (Bitcoin and Ethereum) have been collected and their daily return have been extracted. In order to examine the volatility of variables, we used the multivariate GARCH autocorrelation model. For evaluation of hedging capability of cryptocurrencies based on the minimum risk approach, the following three approaches have been used Constant Conditional Correlation (CCC), Dynamic Conditional Correlation (DCC) and BEKK Diagonal Correlation Matrix.

Results: The results showed that cryptocurrencies can be used to hedge the risk of investment in gold coins and stocks market in Iran. It should be noted that, based on the results, the hedge ratio of Bitcoin is larger than it’s Ethereum, and in order to hedge the risk of investment in gold coins and stocks, Bitcoin has always allocated a higher percentage of the portfolio in comparison to Ethereum. Furthermore, it was found that the dynamic conditional correlation method provided a larger average risk hedge ratio in all portfolios. On the other hand, it was found that the results of the BEKK Diagonal Correlation Method have more fluctuations in comparison to the other approaches. In addition, it was found that in the time of huge devaluation of local currency (from April to December 2020 and from September 2022 to March 2023) the weight of cryptocurrencies should be higher than the other time periods.

Conclusion: Bitcoin and Etherium can hedge investment in the Tehran Stock Exchanage and Iranian Gold Coin market. In should be noted that in times of uncertainty and devaluation of local currency against US dollar, more investment in cryptocurrencies is needed to hedge Investment in gold and stock market.

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Financial Research Journal

Articles in Press, Accepted Manuscript
Available Online from 09 June 2024

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