Investigating Bitcoin’s Financial Properties A modern-day flight to safety asset, hedge or a mere diversifier?
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The objective of this master’s thesis is to study Bitcoin in relation to a selected range of market- and commodity indices by investigating Bitcoin’s hedging, safe haven and diversifying capabilities against said indices. The focus is on a wide range of indices to better represent viable investors’ interests, whether it be investors exposed to equity-, commodity markets or both. The study primarily follows Ratner & Chiu (2013) framework derived from Engle’s (2002) method of dynamic conditional correlation (DCC) and Bollerslev’s (1986) generalized autoregressive conditional heteroskedasticity (GARCH). Our findings suggest that Bitcoin, on average, exhibits exclusively diversification properties against all indices. The diversification effect is most substantial against Energy- and general Commodities and weaker for the market indices. By separating the data sample into sub-periods, we find evidence of shifting dynamics. Here, Bitcoin’s hedging possibilities are most prominent against the Energy commodities. Furthermore, Bitcoin is found to be a significantly greater diversifier against the market indices in less turbulent periods. As a result of Covid-19, the latest sub-period contained the most distress, resulting in a significantly higher correlation between Bitcoin and the indices. Consequently, worsening all hedging, diversifying and safe haven properties.