Effects of economic policy uncertainty shocks on the interdependence between Bitcoin and traditional financial markets

This paper analyses the effects of economic policy uncertainty (hereafter, EPU) on the relationship between Bitcoin and traditional financial markets during the period 27/04/2015 to 25/10/2018, represented by five stock market indices namely the NASDAQ100, S&P500, Euronext100, FTSE100 and NIKKEI225. EPU is measured in terms of economic policy, monetary policy, financial regulation, taxation policy, and the news-based policy uncertainty index for the U.S., U.K., Europe and Japan. By applying a variety of statistical techniques (multivariate EWMA models, Spearman's rho, the Diebold and Yilmaz (2012) spill-over index, GAS models with conditional multivariate Student-t distribution and time-varying scales and correlations, BVAR models with the Litterman/Minnesota priors and nonlinear impulse responses with local projections accounting for different regimes in uncertainty) we estimate interdependence between traditional financial and Bitcoin markets and their reaction to the selected policy shocks. Our findings indicate the investment attractiveness of bitcoin as a hedging tool against shocks in uncertainty in the USA economic policy. The results are significant and potentially useful to researchers, practitioners, and Bitcoin market participants to better understand the nature of Bitcoin and facilitate better portfolio and risk-management decisions. (C) 2020 Board of Trustees of the University of Illinois. Published by Elsevier Inc. All rights reserved.