Modeling the Linkages between Bitcoin, Gold, Dollar, Crude Oil, and Stock Markets: A GARCH‐EVT‐Copula Approach

Abstract

This paper aims to analyze and compare the ability of bitcoin, gold, and dollar to diversify the risk of traditional market such as crude oil and stock markets. Specifically, we model the linkages between bitcoin, gold, dollar, crude oil, and stock markets using the GARCH‐EVT‐copula approach. The results show that the gold market is in the central position among these markets, which is consistent with the status of gold as a major safe asset. Before the outbreak of COVID‐19, bitcoin and the dollar also had the ability to diversify risks, although less effective than gold. However, during the COVID‐19 period, gold loses its dominant position and gold, bitcoin, and dollar can no longer act as a hedge. We measure the value at risk (VaR) and expected shortfall (ES) of simulated portfolios constructed based on these five markets and use several backtesting methods to check the validity of the risk measures. The backtesting results show that our model can provide accurate risk measures before and within the COVID‐19 period, which may help investors and risk managers construct the optimal portfolios.