Cryptocurrency connectedness nexus the COVID-19 pandemic: evidence from time-frequency domains

Abstract

Purpose The purpose of this study is to investigate volatility connectedness between major cryptocurrencies by the virtue of market capitalization. In this context, this paper implements the frequency connectedness approach of Barunik and Krehlik (2018) and to measure short-, medium- and long-term connectedness between realized volatilities of cryptocurrencies. Additionally, this paper analyzes network graphs of directional TO/FROM spillovers before and after the announcement of the COVID-19 pandemic by the World Health Organization. Design/methodology/approach In this study, we examine the volatility connectedness among eight major cryptocurrencies by the virtue of market capitalization by using the frequency connectedness approach over the period July 26, 2017 and October 28, 2020. To this end, this paper computes short-, medium- and long-cycle overall spillover indexes on different frequency bands. All indexes properly capture well-known events such as the 2018 cryptocurrency market crash and COVID-19 pandemic and markedly surge around these incidents. Furthermore, owing to notably increased volatilities after the official announcement of the COVID-19 pandemic, this paper concentrates on network connectedness of volatility spillovers for two distinct periods, July 26, 2017–March 10, 2020 and March 11, 2020–October 28, 2020, respectively. In line with the related studies, major cryptocurrencies stand at the epicenter of the connectedness network and directional volatility spillovers dramatically intensify based on the network analysis. Findings Overall spillover indexes have fluctuated between 54% and 92% in May 2018 and April 2020. The indexes gradually escalated till November 9, 2018 and surpassed their average values (71.92%, 73.66% and 74.23%, respectively). Overall spillover indexes dramatically plummeted till January 2019 and reached their troughs (54.04%, 57.81% and 57.81%, respectively). Etherium catalyst the highest sum of volatility spillovers to other cryptocurrencies (94.2%) and is followed by Litecoin (79.8%) and Bitcoin (76.4%) before the COVID-19 announcement, whereas Litecoin becomes the largest transmitter of total volatility (89.5%) and followed by Bitcoin (89.3%) and Etherium (88.9%). Except for Etherium, the magnitudes of total volatility spillovers from each cryptocurrency notably increase after – COVID-19 announcement period. The medium-cycle network topology of pairwise spillovers indicates that the largest transmitter of total volatility spillover is Litecoin (89.5%) and followed by Bitcoin (89.3%) and Etherium (88.9%) before the COVID-19 announcement. Etherium keeps its leading role of transmitting the highest sum of volatility spillovers (89.4%), followed by Bitcoin (88.9%) and Litecoin (88.2%) after the COVID-19 announcement. The largest transmitter of total volatility spillovers is Etherium (95.7%), followed by Litecoin (81.2%) and Binance Coin (75.5%) for the long-cycle connectedness network in the before-COVID-19 announcement period. These nodes keep their leading roles in propagating volatility spillover in the latter period with the following sum of spillovers (Etherium-89.5%, Bitcoin-88.9% and Litecoin-88.1%, respectively). Research limitations/implications The study can be extended by including more cryptocurrencies and high-frequency data. Originality/value The study is original and contributes to the extant literature threefold. First, this paper identifies connectedness between major cryptocurrencies on different frequency bands by using a novel methodology. Second, this paper estimates volatility connectedness between major cryptocurrencies before and after the announcement of the COVID-19 pandemic and thereby to concentrate on its impact on the cryptocurrency market. Third, this paper plots network graphs of volatility connectedness and herewith picture the intensification of cryptocurrencies due to a major financial distress event.

Volatility Interdependence Between Cryptocurrencies, Equity, and Bond Markets

“…However, the magnitude is greater on the volatility of Litecoin (−0.164) compared to that of Bitcoin (−0.016). This is consistent with recent studies by Fasanya et al ( 2021 ) and Polat and Kabakçı Günay ( 2021 ) who find that volatility spillovers experience significant changes during major market crises. It is worth noting that spillover effect patterns may effectively differ as suggested by Shahzad et al ( 2021 ).…”

“…Fasanya et al ( 2021 ) show that the volatility spillover index experiences significant bursts during major market crises. Polat and Kabakçı Günay ( 2021 ) find that overall spillover indexes fluctuate in periods of crises and the magnitudes of volatility spillovers from each of the studied cryptocurrencies, except for Ethereum, increased after the Covid-19 announcement. Ethereum seems to catalyze the highest sum of volatility spillovers to other cryptocurrencies followed by Litecoin and Bitcoin before the Covid-19 announcement, whereas Litecoin becomes the largest transmitter of total volatility followed by Bitcoin (89.3%) and Ethereum (88.9%) after the announcement of the pandemic.…”

“…Several studies examined the cryptocurrency connectedness during the pandemic to give investors and portfolio managers insights into how the pandemic affected the behavior of cryptocurrencies. Fasanya et al ( 2021 ), Shahzad et al ( 2021 ), and Polat and Kabakçı Günay ( 2021 ) find that volatility spillovers experience significant changes during major market crises. Fasanya et al ( 2021 ) show that the volatility spillover index experiences significant bursts during major market crises.…”

Time–frequency co-movement and risk connectedness among cryptocurrencies: new evidence from the higher-order moments before and during the COVID-19 pandemic

“…In this context, several studies have also confirmed that the COVID-19 pandemic has exerted significant impacts on the interactions among cryptocurrencies (e.g. Yousaf and Ali 2020;Polat and Günay 2021;Naeem et al 2021;Demiralay and Golitsis 2021;Raza et al 2022;Kumar et al 2022;Özdemir 2022;Ahmed and Sleem 2022). More importantly, asymmetric characteristics, tail risk, extreme volatility, and pricing bubbles in the cryptocurrency market have all been identified during the COVID-19 pandemic (see Nguyen et al 2020;Xu et al 2021;González et al 2021;Apergis 2022;Iqbal et al 2021;Montasser et al 2022;Ahn 2022;Shahzad et al 2022).…”

“…However, those studies only measure the spillovers in the time domain, ignoring the frequency dynamics. To fill this gap, Polat and Günay (2021) utilized the DY connectedness Yilmaz 2012, 2014) and the BK frequency connectedness (Baruník and Křehlík 2018) approaches to investigate the dynamic volatility connectedness among cryptocurrencies during the COVID-19 pandemic from time-frequency domains and found that the volatility spillovers intensified greatly after the outbreak of the COVID-19 pandemic and the connectedness varied with frequency bands. These results are also confirmed in the recent work of Kumar et al (2022).…”