Do Cryptocurrencies provide better hedging? Evidence from major equity markets during COVID-19 pandemic

Using the five-minute interval price data of two cryptocurrencies and eight stock market indices, we examine the risk spillover and hedging effectiveness between these two assets. Our approach provides a comparative assessment encompassing the pre-COVID-19 and COVID-19 sample periods. We employ copula models to assess the dependence and risk spillover from Bitcoin and Ethereum to stock market returns during both the pre-COVID-19 and COVID-19 periods. Notably, the COVID-19 pandemic has increased the risk spillover from Bitcoin and Ethereum to stock market returns. The findings vis-à-vis portfolio weights and hedge effectiveness highlight hedging gains;however, optimal investments in Bitcoin and Ethereum have reduced during the COVID-19 pandemic, while the cost of hedging has increased during this period. The findings also confirm that cryptocurrencies cannot provide incremental gains by hedging stock market risk during the COVID-19 pandemic.

Asymmetric spillover and network connectedness between Gold, Brent oil and EU subsector markets

This study examines the dynamic asymmetric return spillovers between gold and oil commodity futures and 22 European equity sectors using the Diebold and Yilmaz (2012) approach. The results show that gold and oil markets are the net recipients of return transmissions from the system, whereas the majority of equity sectors are the net transmitters of return spillovers in the system. Furthermore, negative spillovers are stronger than positive spillovers, suggesting asymmetry in return spillovers. Gold is the smallest recipient/transmitter of return spillovers from/to the system. The time-varying symmetric and asymmetric return spillover rises during the 2011–12 European debt crisis, 2014–15 oil crisis, 2016 Brexit referendum, and the COVID-19 crisis episodes, providing evidence of contagion. More interestingly, the COVID-19 crisis has had the biggest impact on positive and negative return transmission among the markets under study. The pairwise network connectedness analysis reveals the energy (basic resources) sector as the biggest transmitter of positive and negative return spillovers to the crude oil (gold) market. Finally, portfolio risk and downside-risk reduction analyses suggest an optimal weights-based strategy to minimize the risk for gold-stock and oil-stock-based portfolios during down markets. Overall, gold (oil) is considered to diversify the risk of all (few) European equity sectors during crisis and non-crisis periods.

Volatility spillovers between oil and equity markets and portfolio risk implications in the US and vulnerable EU countries

This paper examines the frequency dynamics of volatility spillovers between Brent crude oil and stock markets in the US (S&P500 index), Europe (STOXX600 index), Asia (Dow Jones Asia index) and five vulnerable European Union (EU) countries known as the GIPSI (Greece, Ireland, Portugal, Spain, and Italy). We use the methodologies developed by Diebold and Yilmaz, 2012, Baruník and Křehlík, 2018 and the in-sample VaR performance to achieve our objectives. The results show that the spillover effect between the oil and the considered stock markets is time varying, crisis-sensitive, and frequency-dependent. In addition, this effect had intensified during the onset of the 2008–2009 Global Financial Crisis, the plunge of oil prices that started in the mid-2014, and the occurrence of COVID-19. Furthermore, the results also demonstrate that oil is a net receiver of risk in the system, irrespective of the time horizon. Among the GIPSI markets, the larger and highly indebted EU economies of Italy and Spain are net contributors of risk, while the smaller EU economies of Greece, Ireland, and Portugal as well as Asia are net receivers of risk, also regardless of the time horizons. The US and European stock markets are net contributors of the spillovers, whereas the Asia equity index is a net receiver, irrespective of the frequencies. Finally, the AR(1)-FIGARCH model with the skewed Student-t distribution provides more accurate in-sample estimates in all markets. The hedging is more expensive in the long term than in the short term. The hedging is also more expensive during the ESDC period than the other turbulent periods considered in the study. The hedging effectiveness is also higher in the long term than in the short term, is crisis-sensitive, and depends on the time-investment horizon factor.

The Impact of COVID-19 on the G7 Stock Markets: A Time-Frequency Analysis

We examine the co-movement of the G7 stock returns with the numbers of confirmed COVID-19 cases and causalities based on daily data from December 31, 2019 to November 13, 2020. We employ the wavelet coherence approach to measure the impact of the numbers of confirmed cases and deaths on the G7 stock markets. Our findings reveal that both the number of confirmed COVID-19 cases and the number of deaths exhibit strong coherence with the G7 equity markets, although we find heterogeneous results for the Canadian and Japanese equity markets, in which the numbers of COVID-19 cases and the deaths exhibit only a weak relationship. This evidence is more pronounced in the long-term horizon rather than the short-term horizon. Moreover, the lead-lag relationship entails a mix of lead-lag relations across different countries. We present the implications of these findings for both policymakers and the international investment community.

Dynamic spillover and connectedness between oil futures and European Bonds

This paper examines the spillovers and connectedness between crude oil futures and European bonds markets (EBMs) having different maturities. We also analyze the hedging effectiveness of crude oil futures-bond portfolios in tranquil and turbulent periods. Using the spillovers index of Diebold and Yilmaz (2012, 2014), we show evidence of time-varying spillovers between markets under investigations, which varies between 65% and 83%. Moreover, three-month, six-month, one-year, three-year and thirty-year bond and crude oil futures are net receivers of risk from other markets, whereas the remaining bonds are net contributors of risk to the other markets. Crude oil futures receive more risk from long-term than short-term bonds. Moreover, the magnitude of risk transmission is low for the pre-crisis and economic recovery periods. Crude oil futures contributes significantly to the risk of other markets during the oil crisis and Brexit period. A portfolio risk analysis shows that that most investments should be in oil rather than bonds (except the short-term bonds). The hedge ratio is sensitive to market conditions, where the cost of hedging increases during GFC and ESDC period. Finally, a crude oil futures-bond portfolio offers the best hedging effectiveness during the COVID-19 pandemic period.

Spillovers and diversification potential of bank equity returns from developed and emerging America

We examine the network spillovers, portfolio allocation characteristics and diversification potential of bank returns from developed and emerging America. We draw our results by applying a directional spillover index, the tail-event driven network (TENET) and nonlinear portfolio optimization methods on bank returns. We find that the spillovers and connectedness among banks from emerging America are noticeably smaller than those among banks from developed America. The largest emerging market spillover transmitters and receivers are the banks from Brazil, followed by the banks from Chile. The largest developed market spillover transmitter is JP Morgan Chase. The connectedness among banks from developed America is dominated by the banks from the USA, relative to those from Canada. The total connectedness of the emerging market banks is more intensified than that of the banks from developed America due to the effect of the COVID-19 pandemic. The portfolio optimization shows that in developed America, the largest banks from the USA are the largest risk contributors to total portfolio risk, whereas the banks from Canada contribute the least risk. In emerging America, the banks from Brazil contribute the most risk to total portfolio risk while the banks from Peru and one bank from Colombia contribute the least risk. The portfolio of banks from emerging America offers greater diversification potential and lower total portfolio allocation risk.