Financial modelling, risk management of energy instruments and the role of cryptocurrencies

Toan Luu Duc Huynh; Muhammad Shahbaz; Muhammad Ali Nasir; Subhan Ullah

doi:10.1007/s10479-020-03680-y

Financial modelling, risk management of energy instruments and the role of cryptocurrencies

Toan Luu Duc Huynh, Muhammad Shahbaz, Muhammad Ali Nasir, Subhan Ullah

Research output: Contribution to journal › Article › peer-review

61 Citations (Scopus)

Abstract

This paper empirically investigates whether cryptocurrencies might have a useful role in financial modelling and risk management in the energy markets. To do so, the causal relationship between movements on the energy markets (specifically the price of crude oil) and the value of cryptocurrencies is analysed by drawing on daily data from April 2013 to April 2019. We find that shocks to the US and European crude oil indices are strongly connected to the movements of most cryptocurrencies. Applying a non-parametric statistic, Transferring Entropy (an econophysics technique measuring information flow), we find that some cryptocurrencies (XEM, DOGE, VTC, XLM, USDT, XRP) can be used for hedging and portfolio diversification. Furthermore, the results reveal that the European crude oil index is a source of shocks on the cryptocurrency market while the US oil index appears to be a receiver of shocks.

Original language	English
Pages (from-to)	47-75
Number of pages	29
Journal	Annals of Operations Research
Volume	313
Issue number	1
Early online date	2 Jul 2020
DOIs	https://doi.org/10.1007/s10479-020-03680-y
Publication status	Published - 1 Jun 2022
Externally published	Yes

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This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 8 Decent Work and Economic Growth

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Cite this

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title = "Financial modelling, risk management of energy instruments and the role of cryptocurrencies",

abstract = "This paper empirically investigates whether cryptocurrencies might have a useful role in financial modelling and risk management in the energy markets. To do so, the causal relationship between movements on the energy markets (specifically the price of crude oil) and the value of cryptocurrencies is analysed by drawing on daily data from April 2013 to April 2019. We find that shocks to the US and European crude oil indices are strongly connected to the movements of most cryptocurrencies. Applying a non-parametric statistic, Transferring Entropy (an econophysics technique measuring information flow), we find that some cryptocurrencies (XEM, DOGE, VTC, XLM, USDT, XRP) can be used for hedging and portfolio diversification. Furthermore, the results reveal that the European crude oil index is a source of shocks on the cryptocurrency market while the US oil index appears to be a receiver of shocks.",

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AU - Huynh, Toan Luu Duc

AU - Shahbaz, Muhammad

AU - Nasir, Muhammad Ali

AU - Ullah, Subhan

PY - 2022/6/1

Y1 - 2022/6/1

N2 - This paper empirically investigates whether cryptocurrencies might have a useful role in financial modelling and risk management in the energy markets. To do so, the causal relationship between movements on the energy markets (specifically the price of crude oil) and the value of cryptocurrencies is analysed by drawing on daily data from April 2013 to April 2019. We find that shocks to the US and European crude oil indices are strongly connected to the movements of most cryptocurrencies. Applying a non-parametric statistic, Transferring Entropy (an econophysics technique measuring information flow), we find that some cryptocurrencies (XEM, DOGE, VTC, XLM, USDT, XRP) can be used for hedging and portfolio diversification. Furthermore, the results reveal that the European crude oil index is a source of shocks on the cryptocurrency market while the US oil index appears to be a receiver of shocks.

AB - This paper empirically investigates whether cryptocurrencies might have a useful role in financial modelling and risk management in the energy markets. To do so, the causal relationship between movements on the energy markets (specifically the price of crude oil) and the value of cryptocurrencies is analysed by drawing on daily data from April 2013 to April 2019. We find that shocks to the US and European crude oil indices are strongly connected to the movements of most cryptocurrencies. Applying a non-parametric statistic, Transferring Entropy (an econophysics technique measuring information flow), we find that some cryptocurrencies (XEM, DOGE, VTC, XLM, USDT, XRP) can be used for hedging and portfolio diversification. Furthermore, the results reveal that the European crude oil index is a source of shocks on the cryptocurrency market while the US oil index appears to be a receiver of shocks.

KW - Crude oil

KW - Cryptocurrency

KW - Energy markets

KW - Financial instruments

KW - Risk management

KW - Transfer entropy

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Financial modelling, risk management of energy instruments and the role of cryptocurrencies

Abstract

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