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JEL Classification: G11, G15, Q02
Keywords: gold, Bitcoin, wine, alternative investment, safe haven, hedge, diversifier, quantile coherency, frequency, investment horizon
Abstract
This study investigates relations between returns from the traditional stock markets and alternative investments over different investment horizons. Using a quantile coherency, we verify whether an occurrence of the extreme negative returns calculated over several frequencies in the stock exchange coincides with the occurrence of high positive or negative returns in the Bitcoin, gold and fine wine market. We found that in most cases considered alternative investments may act as a weak hedge in normal market conditions. In times of market stress, for all investment horizons only gold is a safe haven for examined stock markets. Results for Bitcoin and fine wines depend on the investment horizon, but in both cases, we found that there is a contagion effect for long-term investments.
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1.Introduction
Heterogeneous market hypothesis (Müller, Dacorogna, Davé, Pictet et al., 1993; Müller, Dacorogna, Davé, Olsen et al., 1997) stands that market participants can have different investments horizons, dealing frequencies, geographical location, degree of risk aversion, institutional constraints, or transaction costs. A heterogeneity between investors leads to an own reaction time to news, related to their time horizon and characteristic dealing frequency. When an investor struggles with a bad market situation that causes a fall in their portfolio value, they should make decisions that will allow them to reduce losses. The moment when it happens will depend, however, on the investment horizon and the amount of acceptable loss, which is in fact a value related to a certain quantile from the distribution of a portfolio value.
There are many ways for market participants to invest their capital and expand their portfolio composition. Over the last few years, the alternative investments sector has become an important part of the worldwide financial market. Investing in alternatives plays a substantial role in diversification, reducing investor portfolio risk and increasing a portfolio risk-adjusted return. Moreover, they offer access to a wider range of investment opportunities.
There is still no consensus on the exact definition of the alternative investment. It is sometimes considered as an investment that is not simply a long position in a traditional asset (Chambers et al., 2015). Alternatives...