The purpose of this paper is to analyze the hedging capacity of BTC against market uncertainty measured by the uncertainty of American economic policies (EPU) and the implied volatility index (VIX).
This study uses the asymmetric dynamic conditional correlation-GARCH model by Cappiello et al. (2006) to first test the dynamic correlation between BTC returns and the EPU index. Next, we analyze the second dynamic correlation between BTC returns and the VIX index.
The results show that the dynamic BTC and EPU correlations are positive over the entire period of this study. This implies that BTC can be considered a hedging instrument, whereas, the VIX negatively affects BTC returns. This implies that BTC cannot act as an effective hedge against the VIX index.
Future research should expand on the empirical analysis of other approaches to accurately model the effect of uncertainty on the safe haven value of BTC. In addition, other measures of uncertainty should be considered in the analysis.
This empirical study may be used by investors and financial advisors who are looking for a safe haven asset with the objective of meeting the needs covered by financial assets.
This paper adds to the literature by using two different measures of uncertainty and integrating behavioral finance into explaining the dynamic correlations between BTC hedging capacity and these two measures of market uncertainty.
