G7 investors prefer cryptocurrencies, gold or digital gold to hedge their risk? Insights from quantile time frequency connectedness

Abstract

This study provides an in-depth analysis of the dynamic connectedness between G7 stock market indices, traditional cryptocurrencies (Bitcoin, Ethereum), gold, digital gold (PAXG, XAUT), and companies specializing in artificial intelligence (AI). Covering the period from 2020 to 2024, the analysis focuses on four distinct periods: the COVID-19 pandemic, the Russia-Ukraine conflict, the banking crisis triggered by the collapse of Silicon Valley Bank in March 2023 and the speculative rise in the gold markets in 2024. The methodology employs a Quantile Vector Autoregressive (QVAR) connectivity approach, starting with the median quantile and systematically extending to various quantiles to capture the entire distribution of connectedness under different market conditions. Our results reveal significant fluctuations in the Total Connectivity Index (TCI) during the studied crises and demonstrate how the roles of key assets—Bitcoin, Ethereum, gold, PAXG, XAUT, and AI firms—shift between being net emitters and receivers of shocks. These shifts underscore the importance of asset selection in crafting effective hedging strategies. Specifically, we observe that G7 investors adopt varying diversification strategies depending on their domestic market conditions and the specific crisis period. The study highlights that assets for diversification and risk reduction vary by country and crisis. Traditional cryptocurrencies and AI companies in general emerge as promising diversification tools, especially in times of technological disruption and economic uncertainty. Several financial implications for investors and policymakers are proposed, providing insights for optimizing portfolio resilience in the face of global market volatility.