Title: Does Bitcoin hedge inflation risk? A multivariate time series analysis

Abstract

This thesis investigates whether Bitcoin can be considered a valuable hedge against inflation risk. The research examines the relationship between Bitcoin and inflation, the two variables' forecast ability, and how an exogenous shock simulated on one variable affects the other. The research firstly analyzes the relationship between the Bitcoin and 5 years- 5 years (5y5y) forward inflation expectation rate from July 2010 to February 2022. This period is split into two sub-period. The first goes from July 2010 to December 2019, the second sub-period goes from January 2020 to February 2022. Firstly, we explore the relationship between the two variables by applying the VAR model. We implement the VARX model, which allows for the inclusion of an exogenous variable in the multivariate regression. The forecast ability of each variable is investigated through the Granger-causality test, while the effect of the exogenous shock is measured by applying the Impulse response function and the Forecast error variance decomposition. Results show that 5y5y forward inflation expectation affects Bitcoin only in the first sub-period. In all the considered periods, Bitcoin affects 5y5y forward inflation expectation, and there is evidence of Granger causality from Bitcoin to 5y5y forward inflation expectation, both with VAR and VARX. The results show that 5y5y forward inflation expectation affects and Granger cause Bitcoin in the first sub-period only. The Impulse response function reports a strong response of 5y5y forward inflation expectation to a shock on Bitcoin during the second sub-period. Even if a correlation between the variables is founded within all the periods, it appears that Bitcoin has acted as an inflation hedging, particularly in the last two years.