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  1. J. Bus. Econ. Manag.


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Research Article

Journal of Business and Economic Management 10(3): 046-056, May 2022
DOI: 10.15413/jbem.2022.0702
ISSN 2315-7755
2022 Academia Publishing

 

Abstract

 

Is diamond-backed Cryptocurrency as good as the underlying Gem in hedging equity risk?

 

Accepted 16th May, 2022

 

 

Xiang Gao1, Kees G. Koedijk2, Hua Wang3* and Zhan Wang1

1Research Center of Finance, Shanghai Business School in Shanghai, China
2Banking and Finance at School of Economics, Utrecht University in Utrecht, the Netherlands; and CEPR in London, U.K.
3Financial Innovation and FinTech Research Center, Shenzhen Technology University in Shenzhen, China.


Diamond as an asset class stands out in hedging risk for equity positions. However, such merit is difficult to realize due to the lack of efficient markets. This article hence explores the possibility of using diamond-backed coins to obtain exposure to actual diamonds. In specific, the authors measure the hedging performance of the two most prominent cryptocurrencies linked to diamonds and choose PinkCoin with the longest trading data span to compare with a benchmark diamond price aggregate. The authors find that these coins can indeed safeguard portfolios against equity market fluctuations, especially in market downturns. Moreover, they display the characteristic of enhancing portfolio diversification in a standard mean-variance frontier setup. Cryptocurrency’s high exchangeability and volatility have been reconciled with diamond’s safe-haven feature, thus creating unique diversification benefits that can match actions of trading physical gemstones. This implication is of great interest to investors who prefer diamonds to be an addition to their portfolios but worry about liquidity and authenticity.

Key words: Diamond price index, cryptocurrency, diamond-backed coin, equity market portfolio, hedging.

 

This is an open access article published under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Cite this article as:

Gao X, Koedijk KG, Wang H, Wang Z (2022). Is diamond-backed Cryptocurrency as good as the underlying Gem in hedging equity risk?. J. Bus. Econ. Manag. 10(3): 046-056.

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