By Meng Wu (m59wu) & Sijie Xu (s362xu) for STAT974 term paper. Last updated Dec. 2022.
In this research, we use the most current data available to re-evaluate the existing evidence surrounding Bitcoin’s potential to be used as a hedge against inflation. Using vector autoregressive (VAR) models and GARCH-VAR models to assess correlation and causal relationships, we find evidence that refutes the findings of previous studies that Bitcoin can be used to hedge against inflation [Inflation and Bitcoin: A descriptive time-series analysis ], [Bitcoin: An inflation hedge but not a safe haven], [Bitcoin, gold and the dollar – A GARCH volatility analysis]. Using a bootstrapping algorithm combined with the GARCH-VAR models, we also es- tablish the presence of a paradigm shift occurring around the start of the COVID pandemic that serves as evidence supporting a pandemic impact on the behaviour of both Bitcoin returns and expected inflation rates. The multi-series VAR models also identify the oil and real estate index to be more strongly correlated with ex- pected inflation rates than Bitcoin returns, suggesting the presence of confounding variables that may be behind any apparent correlation between Bitcoin returns and expected inflation. Based on the results of our study, the existing claims on the relationship between Bitcoin returns and inflation no longer appear to hold true based on more current post-pandemic data
Install R and R Studio for virtual python environments. Run following command in console to ensure same working configuration.
list.of.packages <- c("rugarch", "dplyr", "tidyverse", "quantmod",
"FinTS", "tseries", "PerformanceAnalytics", "vars", "zoo", "rmgarch")
# Check if packages installed
new.packages <- list.of.packages[!(list.of.packages %in% installed.packages()[,"Package"])]
# Install missing packages
if(length(new.packages)) install.packages(new.packages)Please refer to the Data_Preprocessing.Rmd for the data cleaning and initial testing procedure.
The VAR model mentioned in phase 1 of the study can be found via Model_VAR_Fitting.Rmd. The GARCH-VAR model mentioned in phase 2 and 3 of the study can be found via Model_VAR_GARCH_Fitting.Rmd. The model reguliaized VAR model mentioned in phase 4 of the study can be found via Model_Regularized_VAR.rmd.
Please refer to our paper for more detail.
Re-evaluation of Bitcoin’s Potential as an Inflation Hedge (2022) (c) by Meng Wu & Sijie Xu Re-evaluation of Bitcoin’s Potential as an Inflation Hedge (2022) is licensed under a Creative Commons Attribution 4.0 International License. You should have received a copy of the license along with this work. If not, see http://creativecommons.org/licenses/by/4.0/.