Bitcoin and S&P500: Co-movements of high-order moments in the time-frequency domain

Abstract

Interactions between stock and cryptocurrency markets have experienced shifts and changes in their dynamics. In this paper, we study the connection between S&P500 and Bitcoin in higher-order moments, specifically up to the fourth conditional moment, utilizing the time-scale perspective of the wavelet coherence analysis. Using data from 19 August 2011 to 14 January 2022, the results show that the co-movement between Bitcoin and S&P500 is moment-dependent and varies across time and frequency. There is very weak or even non-existent connection between the two markets before 2018. Starting 2018, but mostly 2019 onwards, the interconnections emerge. The co-movements between the volatility of Bitcoin and S&P500 intensified around the COVID-19 outbreak, especially at mid-term scales. For skewness and kurtosis, the co-movement is stronger and more significant at mid- and long-term scales. A partial-wavelet coherence analysis underlines the intermediating role of economic policy uncertainty (EPU) in provoking the Bitcoin-S&P500 nexus. These results reflect the co-movement between US stock and Bitcoin markets beyond the second moment of return distribution and across time scales, suggesting the relevance and importance of considering fat tails and return asymmetry when jointly considering US equity-Bitcoin trading or investments and the policy formulation for the sake of US market stability.

Is the cryptocurrency market a hedge against stock market risk? A Wavelet and GARCH approach

“…However, during financial instability, conditional correlations between them increase dramatically. These outcomes follow the footprint of Kumar et al (2022) and Bouri et al (2022), who found that financial stress increases the connectedness among financial assets. These dynamic results suggest that unstable cryptocurrencies may act as hedge assets for stock returns during normal times, but during economic turmoil, they are far from being hedge or safe haven instruments for the stock market.…”

“…However, during financial instability, conditional correlations between them increase dramatically. These outcomes follow the footprint ofKumar et al (2022) andBouri et al (2022), who found that financial stress increases the connectednessF I G U R E 6 Wavelet coherence between US Stock Return and Cryptocurrency Return. (a) Wavelet coherence between US Stock and Bitcoin, (b) wavelet coherence between US Stock and Ethereum, (c) wavelet coherence between US Stock and Binance Coin, (d) wavelet coherence between US Stock and Dogecoin.…”

“…However, the correlation is either negative or insignificant during other volatility states. Bouri et al (2022) have discovered time-varying comovement between equities and Bitcoin; they also revealed zero or extremely weak linkages between the two markets before 2018, but the comovement is rising from 2019 onward. Significantly, comovement becomes more intense during COVID.…”

The predictive power of Bitcoin prices for the realized volatility of US stock sector returns

“…Previous studies tend to consider the relationship between Bitcoin prices and the aggregate US stock market index (see, among others, Bouri et al 2017a ; Baur et al 2018 ; Das et al 2020 ; Naeem et al 2020 ; Shahzad et al 2020 ; Koutmos et al 2021 ; Bouri et al 2022 ), 1 pointing to potential diversification benefits arising from the detachment of Bitcoin from the global financial system. Notably, studies examining the Bitcoin–stock nexus at the sectoral level of US stock data are few and limited.…”

“… 10 On a linked front, Kwon ( 2020 ) shows that the tail behavior of Bitcoin is associated with that of the S&P 500 index (see Kwon 2020 ). Bouri et al ( 2022 ) point to significant co-movements in the higher-order moments of the returns of Bitcoin and the S&P 500 index. …”