Spillovers and bivariate portfolios of gold-backed cryptocurrencies and gold during the COVID-19 outbreak

• Published in: Journal of Islamic accounting and business research 2021-09, Vol.12 (7), p.1055-1076
• Main Author: Nugroho, Bayu Adi
• Format: Article
• Language: English
• Subjects: Bank technology; Coronaviruses; COVID-19; Digital currencies; Gold; Investments; Investors; Islamic financing; Islamic law; Pandemics; Random variables; Securities markets; Stock exchanges; Volatility
• ISSN: 1759-0817; 1759-0825
• DOI: 10.1108/JIABR-10-2020-0328

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.