The search for safe haven assets in the time of a global pandemic

Abstract: The global pandemic has initially negatively influenced the financial markets all over the world. As a consequence, the volatility in the stock markets increased and investors have experienced great monetary losses. In addition, the volatility spillover has increased between different markets and assets, which additionally amplifies the negative influence by the pandemic. This motivates the search for safe haven assets in the time of a global pandemic. The aim of this thesis is therefore to analyse if Bitcoin, Ethereum and Binance Coin have diversification benefits, hedging properties and most importantly, if they are able to act as safe haven assets against stock indices, namely MSCI World, MSCI EM 50 and S&P 500, during the global pandemic. In order to analyse this, a diagonal BEKK-GARCH model is used. First, I analyse the volatility spillover between cryptocurrencies and stock indices. Secondly, I perform a dynamic pairwise correlation analysis. Finally, minimum-variance portfolios are constructed and evaluated in order to additionally analyse the hedging capabilities and safe haven properties of the three cryptocurrencies. The results show that there is a presence of volatility spillover between these assets. Moreover, the results show that Bitcoin, Ethereum and Binance Coin have diversification benefits against all stock indices. In general, Bitcoin and Ethereum show hedging properties against stock indices. However, these properties are shown to be time-varying. The search for safe haven assets is of great importance in this time period. The correlation analysis shows that Bitcoin and Ethereum are able to act as save haven assets during the initial phase of the pandemic. This is confirmed by the portfolio analysis. In contrast, Binance Coin shows a high positive correlation with the stock indices, however, by using the possibility to short it, it yields the most favourable results in the portfolio analysis.