The study is extending the ongoing discussion on Bitcoin as a diversification asset with the stock market. Some studies analysed cryptocurrencies as a diversification asset, and few challenged the same. During times of turbulence, it is crucial to gauge further diversification opportunities. Henceforth, the study revisits the opportunities of hedging and diversification with the crypto market from a broader perspective. The study captures the spillover from MSCI World Index and MSCI Emerging Markets Index to Bitwise 10 Crypto Index Fund (BITW). The study has contributed methodologically to the existing literature by applying DY with symmetric and asymmetric dynamic conditional volatility models. The results provide in-depth shreds of evidence that BITW is insulated, neither taking volatilities from other countries nor contributing to the volatilities of other countries. The study provides insight to policymakers and investors.
TopIntroduction And Background Of The Study
Financial integration accelerated the proficiencies of financial intermediaries and the financial markets of the countries (Jappelli et al., 2004). With the advent of liberalization and the initiation of foreign portfolio diversification, the scope of investment in emerging economies has increased. It has been captured by various studies that information spillovers observed from the US market, later transmitted to Asia Pacific markets because of the enormous portfolio inflows from the US (Kim, 2005). This transmission was significant during the financial crisis (Habiba et al., 2020). In the modern era, investors are concerned with portfolio diversification in world-class or non-conventional assets. Nowadays, studies are conducting on to identify diversification opportunities with alternative and non-conventional investments vehicles.
With the increase in technological innovations, virtual currencies are considered an emerging asset class for investment. In the 4th industrial revolution, the crypto market grew enormously and popularised as a digital financial asset for investment and diversification (Dyhrberg, 2016). Investors are fascinated to invest in cryptocurrencies because of the expectations to earn high returns. The global cryptocurrency market is estimated to grow at a CAGR of 56.4% over the forecasted period from 2019 to 2025 (Market Watch, 2021). The key factors leading to the rise in the cryptocurrency market include distributed or transparent ledger technology and the growth in venture capital investments. It is forecasted that popular digital currencies like Bitcoin, Litecoin, Ethereum, and many more will outshine and drive the market (Fortune Business Insights, 2020). The most dominated and highly traded cryptocurrency is Bitcoin, and it has reached an unprecedented height since its introduction in the year 2009. The price of Bitcoin was more than $60000 in April 2021, with a market capitalization of more than USD 1 Trillion (Statista, 2021).
The motivation that triggers the authors to take up this study depends on the fascination of the investors towards cryptocurrencies as an emerging or alternate asset class. The current research is another piece of contribution to the ongoing discussion on cryptocurrencies as a diversification asset. Few studies have analyzed cryptocurrencies as a diversification asset (Stensas et al. 2019, Kliber et al. 2019, Bouri et al. 2020, and Klein et al. 2018). Several studies have challenged the same (Shahzad et al. 2020, Wang et al. 2019, Susilo et al. 2020, and Naeem et al. 2020). During high volatile periods, it becomes crucial to gauge further the hedging and diversification opportunities. Henceforth, the study revisits diversification opportunities with the crypto market from a broader perspective. Studies based on diversification with digital currencies either based on Bitcoin or a few cryptocurrencies as a diversification asset, but the study examines the whole crypto market. Henceforth the study further strengthens the ongoing discussion and captures the crypto market, developed and developing markets. The study focuses on the identification of volatility transmission from developed and emerging markets to the crypto market.