Is Bitcoin a Hedge? How Extreme Volatility Can Destroy the Hedge Property (preprint)

A large literature tests whether Bitcoin can hedge portfolio risk, i.e. reduce the risk if added to a portfolio. Intuitively, given the extreme volatility and thus risk of Bitcoin and cryptocurrencies, the idea that Bitcoin is a hedge may be puzzling. Indeed, we show that for extreme levels of volatility, Bitcoin does not reduce the risk if added to a benchmark equity portfolio. This is not only true on average but also holds for sub-samples, including the COVID-19 crisis period. We conclude that a focus on correlations is not sufficient for extreme levels of volatility.

Cryptocurrencies are Not Immune to Coronavirus: Evidence from Investor Fear (preprint)

This paper examines the effects of fear of coronavirus on returns and volatility of five major cryptocurrencies during the COVID-19 outbreak. Adopting Google search volume on a comprehensive list of coronavirus-related terms to construct a gauge of fear, we show that daily innovations in coronavirus fear are associated with negative returns and positive volatility. The effects are driven by the extreme events and associated googling in March 2020. Out of-sample tests further show a significant contribution of fear to forecasting next-day volatility. The results indicate that (i) cryptocurrencies (particularly bitcoin) are not a safe haven for investors against the COVID-19 pandemic, and (ii) Google searches contain important information to explain cryptocurrency market movements during times of crisis.

The Importance of Spillovers (preprint)

There is a large and growing literature that studies return and volatility spillovers but there is no study that assesses the importance of these spillovers. This paper proposes a novel econometric framework to estimate the importance of spillovers in absolute and relative terms. We define spillovers as lagged correlations and distinguish them from contemporaneous correlations. The application of the framework to 30 large stocks shows that the importance of spillovers is low or negligible on average but high during crisis periods. The estimates indicate that past information is more quickly incorporated in stock prices in normal times than in times of extreme price movements. A comparison of the COVID-19 outbreak with the 2008 financial crisis also suggests that the COVID-19 shock led to more spillovers and thus was more disruptive.