Bitcoin's Role as a Diversification Instrument for ASEAN Investors During COVID-19 Pandemic

Should ASEAN-based conventional and Islamic equity investors invest in Bitcoin to gain portfolio diversification benefits during the Covid-19 pandemic? Motivation: Prior research on the diversification benefits of Bitcoin during the recent pandemic is not conclusive especially from the ASEAN perspective. Convergence of volatility among all stock index returns during the pandemic period may limit investor’s portfolio diversification options due to higher financial integration of international markets. Thus, we propose the possible use of Bitcoin as a diversification tool. With ASEAN region playing a significant role in the world economy, our findings would help many investors understand the implications of including Bitcoin in their portfolios during troubled times. Idea: We examine the conditional volatilities and correlations of Bitcoin returns with conventional and Islamic stock indices during the Covid-19 pandemic era. Our observation period starts from day one after Covid-19 is declared a pandemic until June 2022. Data: We use daily prices of Bitcoin and index returns of six largest stock markets in the ASEAN region from March 13, 2020, to June 30, 2022. We have data for over 600 trading days. We retrieve all data from Thomson-Reuters DataStream and Yahoo Finance. Method/Tools: We use the multivariate GARCH DCC to examine time-varying volatilities and correlations amongst stock indices with Bitcoin. The stages involved include estimating univariate volatility parameters in the first stage and subsequently time varying correlation matrix are estimated in the second stage. Findings: Conditional volatilities are at high levels across all indices when Covid-19 was declared a pandemic and correlations with Bitcoin remains below 0.2. Bitcoin being the most volatile compared to the rest of the indices in the study period, exhibited low correlations with the returns of ASEAN stocks thus revealing potential portfolio diversification benefits. Our findings complement some prior research and contrast with others and bring some new insights on the diversification properties of Bitcoin. Contributions: We provide new evidence that Bitcoin provide diversification benefits to ASEAN-based investors especially Vietnamese-based conventional and Islamic equity investors during Covid-19 pandemic. Overall, Islamic indices despite recording higher volatilities, exhibit lower correlation with Bitcoin than conventional indices.