Can Cryptocurrencies Hedge Oil Price Fluctuations? a Pandemic Perspective
42 Pages Posted: 8 Apr 2022
Abstract
The article aims to verify whether cryptocurrencies can hedge extreme price movements of Brent oil. The COVID-19 pandemic revealed that the prices of oil are strongly dependent on economic uncertainty, as well as on the mobility factor. We analyse the Brent oil prices from February 10, 2020, to February 10, 2022. As potential hedges, we consider Bitcoin, BNB, Ether, Tether, and USDCoin, top-five cryptocurrencies by market capitalization. We explore their potential to protect the oil investment using two approaches. The first one concentrates on the movement of prices, while the second - on minimising the portfolio volatility. We use three modelling techniques: asymmetric causality in prices, threshold vector-autoregressive model for returns, and dynamic conditional correlation analysis. We show that although stablecoins offer the best protection against the down movements of oil prices, they do not allow to reduce the investment volatility.
Keywords: Cryptocurrencies, Brent Oil, stablecoins, threshold VAR, asymmetric causality, DCC-MSV
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