Can diversification be improved by using cryptocurrencies? Evidence from Indian equity market
Journal of Financial Economic Policy
ISSN: 1757-6385
Article publication date: 27 September 2023
Issue publication date: 7 November 2023
Abstract
Purpose
This study aims to investigate the possibilities of cryptocurrencies as hedges and diversifiers in the Indian stock market before and during financial crisis due to the pandemic and the Russia–Ukraine war.
Design/methodology/approach
Researchers have used daily data on cryptocurrencies and Indian stock prices from March 10, 2015 to August 26, 2022. The researchers have used the dynamic conditional correlations (DCC)-GARCH model to determine the volatility spillover and dynamic correlation between stocks and digital currencies. Further, researchers have explored hedge ratio, portfolio weight and hedging effectiveness using the estimates of the DCC-GARCH model.
Findings
The findings indicate a negative conditional correlation between equities and cryptocurrencies before the crisis and a positive conditional correlation except for Tether during the crisis. Which implies that cryptocurrencies serve as a hedging asset in the stock market before a crisis but are not more than a diversifier during the crisis, except for Tether. Notably, Tether serves as a safe haven during times of crisis. Finally, the study suggests that Bitcoin, Ethereum, Binance Coin and Ripple are the most effective diversifiers for Indian stocks during the crisis.
Originality/value
This study makes several contributions to the existing literature. First, it compares the hedge and diversification roles of cryptocurrencies in the Indian stock market before and during crisis. Second, the study findings provide insights on risk hedging and can serve as a guide for investors. Third, it may help rational investors avoid underestimating risk while constructing portfolios, particularly in times of financial turmoil.
Keywords
Acknowledgements
The authors thank two anonymous reviewers and Dr. Frank Mixon (Editor, Journal of Financial Economic Policy) for helpful comments on a previous draft of this paper. Also, our sincere gratitude goes to Nidhi Agarwala (Doctoral Research Fellow, Vidyasagar University) for helping us improve the quality of our writing. All remaining errors are the responsibility of the authors.
Competing interests: The authors have no competing interests.
Funding: No funding is used.
Authors’ contributions: All the authors equally contributed.
Citation
Jana, S. and Sahu, T.N. (2023), "Can diversification be improved by using cryptocurrencies? Evidence from Indian equity market", Journal of Financial Economic Policy, Vol. 15 No. 6, pp. 551-573. https://doi.org/10.1108/JFEP-02-2023-0047
Publisher
:Emerald Publishing Limited
Copyright © 2023, Emerald Publishing Limited