CORRELATION BETWEEN BITCOIN, STOCKS AND GOLD: A MARKOV REGIME-SWITCHING APPROACH

Abstract

The following article explores the correlation between bitcoin and both stocks and gold.A Markov regimeswitching approach was used to identify and date two regimes in each of these financial assets.Stock returns are characterized by short-lived episodes of elevated volatility and negative returns whereas bitcoin returns are characterized by a persistent high volatility state with positive returns.Gold stayed in the low volatility period most of the time and only a few short-lived episodes of high volatility were identified during the first year of the pandemic.A concordance measure was computed to assess the synchronicity and correlation between the regimes.The regimes of bitcoin and gold are uncorrelated suggesting that bitcoin is not yet perceived as a safe haven like gold.The regimes of bitcoin and stocks were also uncorrelated suggesting that bitcoin may be used as a hedge against stocks.