Reduce extreme losses and retain extreme profits through hedging with gold and cryptocurrencies: A global stock market perspective

Krzysztof Echaust; Małgorzata Just

doi:https://doi.org/10.59139/ps.2023.04.2

Krzysztof Echaust Poznań University of Economics and Business, Department of Operations Research and Mathematical Economics, al. Niepodległości 10, 61-875 Poznań, Poland ORCID:https://orcid.org/0000-0002-3855-256X , Małgorzata Just Poznań University of Life Sciences, Department of Finance and Accounting, ul. Wojska Polskiego 28, 60-637 Poznań, Poland ORCID:https://orcid.org/0000-0001-7655-6046 Przegląd Statystyczny. Statistical Review, vol. 70, 2023, 4, pages: 37-72 Published online: 29 November 2024 DOI https://doi.org/10.59139/ps.2023.04.2 Citation: Echaust, K., & Just, M. (2023). Reduce extreme losses and retain extreme profits through hedging with gold and cryptocurrencies: A global stock market perspective. Przegląd Statystyczny. Statistical Review, 70(4), 37–72. https://doi.org/10.59139/ps.2023.04.2.

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ABSTRACT

The study focuses on the safe-haven and hedging properties of gold and selected cryptocurrencies against stock markets' extreme risk observed during the COVID-19 pandemic and the Russian invasion of Ukraine. The loss reduction is compared with the profit sacrifice obtained through hedging in terms of the tail thickness of the return distribution. The findings show that gold is able to reduce extreme losses more intensively than extreme profits. Tether reduces volatility and tail risk the most effectively but it is characterised by the worst profit/risk ratio. Bitcoin and Ether increase investment risk; thus, they fail to act as an effective hedge or a safe haven. On the other hand, these cryptocurrencies added to the stock portfolio increase the probability of extreme profits more than extreme losses. The paper provides new insights into the benefits of safe-haven or hedging strategies.

KEYWORDS

gold, cryptocurrencies, conditional value at risk, distribution tail, hedging, safe haven

JEL

C13, C58, G11, G15

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