First of all, we would like to take this opportunity to express our utmost gratitude to our research supervisor, Mr. In addition, we would like to sincerely thank our examiner, Dr. Tunku Abdul Rahman (UTAR) for giving us the opportunity to conduct this research.
For example, Bloomberg Terminal, which simplifies the data collection process, and the e-database platforms, which give us access to the voluminous journal articles needed for this research. Finally, we would like to thank our families and friends for their mental support, understanding, motivation and encouragement. This research examines the hedging capabilities of cryptocurrencies (Bitcoin, Ethereum, XRP, and Dogecoin) against the Cboe Volatility Index (VIX), Global Economic Policy Uncertainty (GEPU), and Geopolitical Risk (GPR).
This research will use Pooled Ordinary Least Square (OLS) model, Fixed Effect Model (FEM) and Random Effect Model (REM) to investigate the direct impact of Cboe Volatility Index (VIX) and the indirect impact of uncertainties (GEPU and GPR) on the returns of cryptocurrencies. Investors, policy makers and future researchers can gain valuable information through the results of this research.
Research Background
The first chapter contains an introduction related to an overview of cryptocurrencies including Bitcoin, Ethereum, XRP and Dogecoin and a summary of Economic Policy Uncertainty (EPU), Geopolitical Risk (GPR) and the Cboe Volatility Index (VIX) which served as independent variables of the cryptocurrency price . In addition, Felman also stated that Dogecoin is part of GameStop's boom, "people love these stories and they love these kinds of jokes." The boom of Dogecoin is because it captures the mind of every investor (Sigalos, 2021). If the country of the supply side has a higher geopolitical risk, production will be disrupted or
The Cboe Volatility Index (VIX) has been chosen as one of the independent variables that will directly affect the returns of cryptocurrencies in our study. Therefore, EPU has been chosen as one of the independent variables that will indirectly influence the returns of cryptocurrencies in our study. Therefore, GPR has been chosen as one of the independent variables that will indirectly influence the returns of cryptocurrencies in our study.
The idea of the impact of uncertainties on cryptocurrency returns has not been sufficiently explored. There is a lack of studies that examine the direct impact of the Cboe Volatility Index (VIX) on cryptocurrency returns as well as the indirect effect of EPU and GPR on cryptocurrency returns.
Therefore, our team decided to select 3 more different cryptocurrencies namely Ethereum, XRP and Dogecoin to further study the direct impact of VIX on cryptocurrencies. Do economic policy uncertainty (EPU) and geopolitical risk (GPR) indirectly affect cryptocurrency returns. To analyze the ability of cryptocurrencies to act as a hedge against the Cboe Volatility Index (VIX).
To analyze the ability of cryptocurrencies to hedge the indirect effect of economic policy uncertainty (EPU) and geopolitical risk (GPR).
According to Hong et al. 2021), the researchers investigated the relationships of stock market risk and stock market returns of the US. Most of the papers focus on only one specific variable when accessing the ability for cryptocurrencies to hedge. Finally, this chapter will include the selection of the most appropriate model to estimate the impact of the volatility on the returns of cryptocurrencies.
Finally, the monthly prices of cryptocurrencies (Bitcoin, Ethereum, XRP and Dogecoin) are obtained from the CoinMarketCap website. Once the data is logged, the difference between 𝑡 and (𝑡 − 1) is made to show the cryptocurrency returns and changes in the uncertainty index. For example, economic recession during the COVID-19 pandemic increases stock market volatility (Dai et al., 2021).
As stock market volatility increases, investors may choose to reduce stock investment. By including GEPU as one of the independent variables, the investment decision for cryptocurrencies can be influenced by the indirect effect of GEPU on cryptocurrency returns. By including GPR as one of the independent variables, the indirect effect of GPR on cryptocurrency returns can be well justified.
As shown in the basic model, there will be two uncertainties that will affect the VIX and in other words indirectly affect the returns of cryptocurrencies. The subscript 𝑖 added to 𝛽0 indicates that a different individual may have a different intercept, and 𝛽1 to 𝛽𝑘 refers to the coefficient of the independent variable. 𝐷𝑘𝑖 refers to the dummy variable of individuals and 𝛽0,𝑘 refers to the cross section of these dummy variables.
Finally, μ refers to the error term of the model and 𝜀𝑖𝑡 refers to the error term of random individuals. But by referring to the p-value in each regression model, the null hypothesis that there is no relationship between cryptocurrency returns and the VIX index is not rejected, as the p-value from all regression models is greater than 10%. Which suggests that there is no relationship between cryptocurrency returns and the indirect effect of GEPU.
Based on the table above, the first variable is the past return of the cryptocurrencies. In terms of the pooled OLS model, when the VIX index increases by an average of 1%, the return of cryptocurrencies will decrease ceteris paribus. Similar to the indirect impact of GEPU, the p-value of the GPR indirect impact is also greater than the 10% significance level in all regression models.
A re-estimation of the Pooled OLS model was made and all independent variables had no relation to the return of the cryptocurrencies.
