From financial markets to Bitcoin markets: A fresh look at the contagion effect

Abstract

This article studies contagion effects between traditional financial markets, represented by five equity indices and the EUR, USD, GBP, and JPY centralized Bitcoin markets. We apply a regime switching skew-normal model of asset returns that distinguishes between linear and non-linear contagion and also structural breaks in the periods. We find significant contagion effects from financial to Bitcoin markets in terms of both correlation and co-skewness of market returns. Our results also indicate that during crisis periods, risk-averse investors tend to move away from risky Bitcoin markets towards safer financial markets.

Asymmetric nexus between COVID-19 outbreak in the world and cryptocurrency market

“…Periods of extreme financial stress can cause spillover effects in the cryptocurrency markets ( Ji, Bouri, Lau, & Roubaud, 2019 ). A recent study suggests that the direction of contagion in case of financial disasters is from traditional to crypto-markets, and investors avoid crypto-assets in the times of extreme stress ( Matkovskyy & Jalan, 2019 ). Stress in the global financial markets can cause significant changes in the upper and the lower distributions of the cryptocurrencies such as Bitcoin, exhibited by the copula-based quantile models ( Bouri, Gupta, Lau, et al, 2018c ).…”

Can Bitcoin Be a Safe Haven in Fear Sentiment?

“…Bitcoin, as a virtual asset, has inherent risk attributes, which are mainly reflected in the lack of supervision and hacker threats, so it cannot hedge against the US market (Stavroyiannis & Babalos, 2017). Matkovskyy and Jalan (2019) indicate that rational investors tend to shift from the speculative Bitcoin markets to highly liquid assets in crisis periods when the market fear sentiment is high. Smales (2019) points out Bitcoin market has yet to mature, it is not reliable to consider Bitcoin as a hedge given the financial crisis that accompanies the spread of fear sentiment.…”

One size does not fit all: external driver of the cryptocurrency world

“…As reported by Cagli (2019), cryptocurrency literature began with an understanding of blockchain technology with studies such as Böhme et al (2015) and Sadeghi (2013). Later, the literature expanded in multiple directions including market efficiency (Gozgor et al , 2019; Hu et al , 2019; Sensoy, 2019; Al-Yahyaee et al , 2018; Vidal-Tomás and Ibañez, 2018; Bariviera, 2017; Jiang et al , 2018; Nadarajah and Chu, 2017; Urquhart, 2016); price behavior, volatility and their determinants (Aalborg et al , 2019; Akyildirim et al , 2019; Baumöhl, 2019; Bouri et al , 2019a; Charfeddine and Maouchi, 2019; Matkovskyy and Jalan, 2019; Phillip et al , 2019; Demir et al , 2018; Panagiotidis et al , 2018; Balcilar et al , 2017); portfolio implications, risk management, and hedging (Bouri et al , 2019b; Kurka, 2019; Wang et al , 2019; Wu et al , 2019; Corbet et al , 2018; Bouri et al , 2017; Dyhrberg, 2016) price discovery (Shen et al , 2019; Ciaian et al , 2015; Brandvold et al , 2015) investor behavior and sentiment (Aloosh and Ouzan, 2019; Baig et al , 2019; Ballis and Drakos, 2019; Kaiser and Stöckl, 2019; Ayvaz and Shiha, 2018) and finally applicability of technical trading (Corbet et al , 2019) and alternative trading strategies (Leung and Nguyen, 2019).…”

“…The majority of the existing literature on the cryptocurrency market focuses on Bitcoin and less on the detection of the impact of external factors on other coins. Previous studies document significant contagion effects from financial markets to Bitcoin markets (Matkovskyy and Jalan, 2019) and suggest substantial shock transmission between Bitcoin and traditional assets (Kurka, 2019). They also investigate the relationship between uncertainty and Bitcoin regarding the index of TPI in the USA (Gozgor et al , 2019), economic policy uncertainty (EPU) and volatility index (VIX).…”