Hedging effectiveness of alternative assets: evidence from range-based dynamic correlation models

Purpose This study aims to investigate whether alternative assets – specifically Bitcoin, gold, oil and real estate – can effectively hedge risks associated with conventional equity markets. Design/methodology/approach The analysis employs a range-based dynamic conditional correlation (DCC) model that integrates high and low price data to capture more nuanced market relationships. A range-based volatility spillover model is also used to examine the directional spillovers between equity markets and alternative assets. Findings Results indicate a weak co-movement between alternative assets and stock markets. While Bitcoin is identified as the least costly hedge, it proves inefficient in risk mitigation. Gold and real estate emerge as more effective hedging tools, with gold offering the most significant downside risk reduction. The study also finds that the COVID-19 pandemic significantly weakened the hedging capabilities of all alternative assets. In terms of expected utility, gold delivers the highest utility, especially for highly risk-averse investors. Originality/value This paper uniquely applies range-based correlation and volatility spillover models to assess the hedging effectiveness of alternative assets. It also provides new insights into how these relationships shift during periods of market stress, such as the COVID-19 pandemic.