Nexus between Southeast Asian stock markets, bitcoin and gold: spillover effect before and during the COVID-19 pandemic
| DOI | https://doi.org/10.1108/JABS-02-2021-0050 |
| Published date | 11 October 2021 |
| Date | 11 October 2021 |
| Pages | 693-711 |
| Subject Matter | Strategy,International business |
| Author | Yosuke Kakinuma |
Nexus between Southeast Asian stock
markets, bitcoin and gold: spillover effect
before and during the COVID-19
pandemic
Yosuke Kakinuma
Abstract
Purpose –This study aims to provide empirical evidence on the return and volatility spillover effects
between SoutheastAsian stock markets, bitcoinand gold in the periods before and duringthe COVID-19
pandemic. The interdependence among different asset classes, the two leading stock markets in
SoutheastAsia (Singapore and Thailand),bitcoin and gold, is analyzed for diversificationopportunities.
Design/methodology/approach –The vector autoregressive-Baba, Engle, Kraft, and Kroner-
generalized autoregressive conditional heteroskedasticity model is used to capture the return and
volatilityspillover effects between different financialassets. The data cover the period from October2013
to May 2021. The full period is divided into two sub-sample periods, the pre-pandemic period and the
during-pandemic period, to examinewhether the financial turbulence caused by COVID-19 affects the
interconnectednessbetween the assets.
Findings –The stocks in Southeast Asia, bitcoin and gold become more interdependent during the
pandemic. Duringturbulent times, the contagioneffect is inevitable regardless of regionand asset class.
Furthermore, bitcoindoes not provide protection for investors in SoutheastAsia. The pricing mechanism
and technology behind bitcoin are different from common stocks, yet the results indicate the co-
movement of bitcoinand the Singaporean and Thai stocks during the crisis. Finally, risk-averseinvestors
should ensure that gold constitutes a significant proportion of their portfolio, approximately 40%–55%.
This strategyprovides the most effective hedge againstrisk.
Originality/value –The mean return and volatility spillover is analyzed between bitcoin, gold and two
preeminentstock markets in Southeast Asia. Mostprior studies test the spillover effect betweenthe same
asset classes such as equities in different regions or different commodities, currencies and
cryptocurrencies. Moreover, the time-series data are divided into two groups based on the structural
break caused by the COVID-19 pandemic.The findings of this study offer practical implications for risk
management and portfoliodiversification. Diversification opportunitiesare becoming scarce as different
financialassets witness increasing integration.
Keywords Emerging markets, Volatility, Spillover effects, COVID-19 pandemic, BEKK GARCH,
Spillover
Paper type Research paper
1. Introduction
This study examines the return and volatility spillover effect between the Southeast Asian
stock markets, bitcoin andgold with respect to the periods before and during the COVID-19
pandemic. The purpose of this paperis to explore diversification opportunities by analyzing
the interconnectedness among four financial assets: common stocks in Singapore and
Thailand, bitcoin and gold. COVID-19, the impact of which was felt in 2020 and 2021,
shocked global financial markets simultaneously and spontaneously. Prior studies find
Yosuke Kakinuma is based
at the Department of
Finance, CMU Business
School, Chiang Mai
University, Chiang Mai,
Thailand.
Received 4 February 2021
Revised 8 June 2021
29 August 2021
14 September 2021
Accepted 18 September 2021
DOI 10.1108/JABS-02-2021-0050 VOL. 16 NO. 4 2022, pp. 693-711, ©Emerald Publishing Limited, ISSN 1558-7894 jJOURNAL OF ASIA BUSINESS STUDIES jPAGE 693
increased interdependence between markets during a crisis (Choudhry and Jayasekera,
2014;Jawadi et al.,2015;Amir et al.,2020;Habiba et al.,2020). Therefore, risk mitigation
by including other asset classes in a portfolio becomes crucial for equity investors during a
market downturn. The current study focuses on bitcoin and gold as possible diversifiers for
equity markets. Bitcoin stands out from other financial assets because its pricing
mechanism is different. Bitcoinprices rely less on economic and financial fundamentals but
more on their unique features such as investors’ interest in cryptocurrency (Kristoufek,
2015), mining technology (Li and Wang, 2017), anonymity (Ober et al., 2013), computer
programming enthusiasts and illegal activity (Yelowitz and Wilson, 2015). Bitcoin and gold
are analyzed together to see if they act as a safe haven or hedge during a market slump
when diversification benefits are desired the most (Hussain Shahzad et al.,2020). Bitcoin
and gold are weakly correlated and only sporadically linked (Kristoufek, 2015), suggesting
that they can be effective risk diversifiers in combination. Selmi et al. (2018) argue that
bitcoin and gold are assets investors park their cash in during times of economic turmoil.
The two assets share some distinguishing characteristics that can produce synergetic
effects for diversification when they are combined. First, they effectively hedge against
inflation because of limitations or scarcity of supply. Second, unlike conventional assets
such as stocks and bonds, neither bitcoin nor gold generates cash flows. Finally, an
inverted asymmetric reaction to positive and negative news is present in both assets
(Shahzad et al.,2019).
Recent studies (Wang et al., 2019;Pavkovi
cet al.,2019) document evidence that bitcoin
offers diversification opportunities. Bitcoin has gained popularity among speculators and
investors because of its sizablereturns and high volatility (Baek and Elbeck, 2015). Bitcoin’s
unique properties include blockchain technology which enablesdecentralized and trustless
payment systems. The underlying foundations of cryptocurrency are entirely different from
those of equity markets, which leads to a weak correlation between bitcoin and stock
returns (Baur et al., 2018;Ji et al.,2018;Fang et al., 2019). Bitcoin was notably considered
a safe-haven asset during the Cypriotbanking crisis of 2012–2013 (Luther and Salter, 2017)
when decentralized cryptocurrency was favored over the fiat currency. As bitcoin shows an
increasing presence in the financialworld, bitcoin has become readily available to investors
through bitcoin-linked funds. The Grayscale Bitcoin Trust tracks the underlying value of
bitcoin, similar to standard & poor’s depositary receipt (SPDR) shares exchange-traded
fund (ETF) (GLD), which tracks the underlying value of gold. Alternatively, investors can
indirectly hold bitcoin by investing in firms that own bitcoin such as a high-profile publicly
listed company, Tesla, Inc. This study tests how bitcoin’s return and volatility transmission
influence the Thai and Singaporean markets’ movements andvice versa.
Gold plays an important role in the financialmarket. It hedges against inflation (Hoang et al.,
2016) and responds counter-cyclically to negative economic news (Elder et al., 2012).
When stock markets suffera sudden downfall, gold can be a store of value or often increase
its value. Thus, gold has been considered a hedge against stocks in normal times and a
safe haven in extreme market conditions (Baur and Lucey, 2010;Beckmann et al.,2015).
However, Baur and McDermott (2010) conclude that gold’s safe-haven property is valid
only for developed markets but not for large emerging markets such as the Brazil, Russia,
India, and China countries. The present study provides empirical evidence from the two
largest capital markets in Southeast Asia: Singapore (developed market) and Thailand
(emerging market). From a global perspective, Southeast Asian markets have had little
exposure and low correlation with the western markets until the early 2000s (Aityan et al.,
2010). Nonetheless, because of the economic development in the region, Southeast Asian
equity markets have become an essential constituent of fund managers’ international
portfolios for diversification (Jan et al., 2000;Johnson and Soenen, 2002;Narayan et al.,
2014). According to The Stock Exchange of Thailand (2021), Singapore is the largest stock
exchange by market capitalization in Southeast Asia, followedby Thailand. The Thai market
provides the highest liquidity with the largest daily average turnover and Singapore is the
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