Spillover effects and hedging abilities of cryptocurrencies: a case of the South African market

Abstract

The study analyses the spillover effects of cryptocurrencies to establish if cryptocurrencies possess any hedging abilities for South African markets. Different and ZAR/USD exchange rate, Gold and Johannesburg All Share Index (JSE-ALSI) were studies between the period 01/01/2016 to 31/12/2020. The study employed the Baba, Engle, Kraft and Kroner (BEKK) and multiplicative dynamic conditional correlation (MDCC) multivariate generalised autoregressive conditional heteroscedasticity (GARCH) models. The results of the study indicate the presence of volatility spillovers from the cryptocurrencies to the South African markets through the JSE market and the Rand. A bidirectional shock transmission between the JSE market and Bitcoin and a unidirectional spillovers from Dogecoin and Litecoin to JSE was found. The study also proved that cryptocurrencies are not yet at a stage where they can replace Gold as a hedge tool. The results show predominantly low correlations between the South African market (JSE and The Rand) and cryptocurrencies. Suggesting the presence of diversification and hedging abilities of cryptocurrencies.