Spillovers and bivariate portfolios of gold-backed cryptocurrencies and gold during the COVID-19 outbreak
Journal of Islamic Accounting and Business Research
ISSN: 1759-0817
Article publication date: 11 August 2021
Issue publication date: 3 September 2021
Abstract
Purpose
This paper aims to analyze the time-varying connectedness of gold-backed cryptocurrencies and gold. This study determines the volatility spillovers in these two asset classes and the performance of bivariate portfolios based on net pairwise spillovers.
Design/methodology/approach
This research uses two Islamic and four conventional gold-backed cryptocurrencies and gold as variables. GJR-GARCH method under corrected DCC (cDCC) of Aielli (2013) evaluates the dynamic connectedness. Additionally, the spillovers are created using the dynamic connectedness of Diebold and Yilmaz (2012). A network-based spillover of Diebold and Yılmaz, (2014) is also made. A dynamic optimal weights strategy optimized with DCC-t-Copula determines bivariate portfolios’ performances. In general, there are 21 bivariate portfolios.
Findings
The outbreak of COVID-19 increases the dynamic connectedness of gold and gold-backed cryptocurrencies, which indicates a contagion effect. The results show that gold is the net volatility receiver during the COVID-19 pandemic. Moreover, a portfolio composed of gold and gold-backed cryptocurrency provides high profitability performance but zero hedge effectiveness under optimal weights strategy.
Practical implications
According to bivariate portfolios based on net pairwise spillovers, gold-backed cryptocurrencies' investors should not add gold to their portfolio during the pandemic because it is a net receiver of risk from the cryptocurrencies.
Originality/value
To the best of the author’s knowledge, this is the first paper to create bivariate portfolios composed of gold-backed cryptocurrencies and their underlying asset using DCC-t-Copula.
Keywords
Acknowledgements
Author would like to thank the editors and anonymous reviewers for helpful comments and suggestions. All errors are mine.
Funding: This research received no specific grant from any funding agency in the public, commercial, or not-for-profit sectors.
Citation
Nugroho, B.A. (2021), "Spillovers and bivariate portfolios of gold-backed cryptocurrencies and gold during the COVID-19 outbreak", Journal of Islamic Accounting and Business Research, Vol. 12 No. 7, pp. 1055-1076. https://doi.org/10.1108/JIABR-10-2020-0328
Publisher
:Emerald Publishing Limited
Copyright © 2021, Emerald Publishing Limited