Do Bubbles in the Bitcoin Market Impact Stock Markets? Evidence From 10 Major Stock Markets

Abstract

In this paper, we examine the effect of explosive behaviors in the Bitcoin market on the top 10 largest stock markets of developed and emerging countries. The daily dataset, including the Dow Jones Industrial Index (DJIA), Nasdaq (NSQ), Shanghai Composite Index (SSE), Nikkei 225 (N225), Hang Seng Index (HSI), Shenzhen Composite Index (SZSE), Euronext Amsterdam Index (AEX), London Stock Exchange (LSE), Toronto Stock Exchange (TSX), and Bombay Stock Exchange (BSE), spans July 21, 2010, to December 9, 2022. We first investigate the existence of explosive price behaviors using the bubble detection test of Phillips and Shi and the results provide evidence of multiple bubble episodes, coinciding with the monetary policy actions of the FED and ECB. Then, we address the question of whether the explosive behaviors detected affect the variance of equity returns by employing a GARCH model. The impact is negative, albeit its magnitude and significance vary among stock indices.

Bitcoin’s bubbly behaviors: does it resemble other financial bubbles of the past?

“…It is often claimed that Bitcoin is an asset with bubbly behavior. Many researchers have tried to prove this claim, including, among others, Obayashi et al, 2015;Waters, 2019;Gronwald, 2021;Caferra et al, 2021;Li et al, 2022;Gemici et al, 2023;Podhorsky, 2024;and M´bakob, 2024. Essentially, in the academic literature, we can distinguish two different approaches.…”

“…This part of the literature has focused on applying econometric techniques to find patterns in Bitcoin price behavior. Many of these studies have built models that try to model the evolution of Bitcoin prices and be able to serve as bubble prediction tools and regulatory tools (Cheung et al, 2015, Fry andCheah, 2016;Cagli, 2019;Geuder et al, 2019;Cretarola and Figà-Talamanca, 2020;Gemici et al, 2023).…”