An examination of the hedging properties of gold and bitcoin using volatility

Abstract

Gold has been considered a hedge against inflation for a long time, although researchers have found different results in their examinations. Bitcoin, a relatively new phenomenon in the financial market, is also, for some investors, a monetary protection against central banks' actions resulting in inflation. Studying the effects of different economic variables such as volatility, inflation and interest rates on investments is of great value for investors when deciding whether to buy, sell or hold on to an asset. This study examined if gold and bitcoin's conditional volatilities can be useful when determining a hedge against inflation. It did so by investigating the relationship between the asset's conditional volatility, log returns and inflation levels in Sweden and the USA. The S&P 500 and OMXSPI, representing the stock markets in both the USA and Sweden respectively, were both included in the thesis as comparisons with gold and bitcoin, as they are considered alternative investments to each other. We did this such comparison to see if these investment objects exhibit different hedging properties. While this study did not confirm the conditional volatility to be a good indication or strategy for hedging against inflation, it did signal different relationships between the conditional volatilities of gold and bitcoin relative to the two countries' inflation.