Dynamic interactions between the bitcoin price index and widely traded financial assets: evidence from the recent covid-19 crisis

Abstract

We investigate the connectedness between the Bitcoin Price Index (BPI) and widelytraded financial assets from a variety of markets (equities, bonds, commoditiesand fiat currency). Using daily data from 5 August 2013 to 31 August 2021 (beforeand during the COVID-19 crisis), we run the VAR model estimation to investigateany connectedness between the BPI and financial assets, followed by the Grangercausality test. We then test Diebold and Yilmaz’s (2012) framework to analyse thespillover effects among our set of variables. Our empirical results provide strongevidence that the BPI index exhibits significant independence from widely tradedfinancial assets. This independence is less pronounced during the COVID-19 crisis,but remains relatively important. To test whether Bitcoin constitutes a relevantdiversification vehicle, we compute the Sharpe portfolio performance index of twoportfolios of conventional assets with and without the BPI, before and during theCOVID-19 crisis. Our results show that the introduction of the BPI index as a diversificationasset does not improve portfolio performance. Overall, our empiricalfindings are robust to different robustness tests and provide several implicationsfor hedgers, portfolio managers and policymakers.