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

Abstract

Analyzing comovements and connectedness is critical for providing significant implications for crypto-portfolio risk management. However, most existing research focuses on the lower-order moment nexus (i.e. the return and volatility interactions). For the first time, this study investigates the higher-order moment comovements and risk connectedness among cryptocurrencies before and during the COVID-19 pandemic in both the time and frequency domains. We combine the realized moment measures and wavelet coherence, and the newly proposed time-varying parameter vector autoregression-based frequency connectedness approach (Chatziantoniou et al. in Integration and risk transmission in the market for crude oil a time-varying parameter frequency connectedness approach. Technical report, University of Pretoria, Department of Economics, 2021) using intraday high-frequency data. The empirical results demonstrate that the comovement of realized volatility between BTC and other cryptocurrencies is stronger than that of the realized skewness, realized kurtosis, and signed jump variation. The comovements among cryptocurrencies are both time-dependent and frequency-dependent. Besides the volatility spillovers, the risk spillovers of high-order moments and jumps are also significant, although their magnitudes vary with moments, making them moment-dependent as well and are lower than volatility connectedness. Frequency connectedness demonstrates that the risk connectedness is mainly transmitted in the short term (1–7 days). Furthermore, the total dynamic connectedness of all realized moments is time-varying and has been significantly affected by the outbreak of the COVID-19 pandemic. Several practical implications are drawn for crypto investors, portfolio managers, regulators, and policymakers in optimizing their investment and risk management tactics.

Dynamic connectedness and network in the high moments of cryptocurrency, stock, and commodity markets

“…This result is consistent with the findings of Finta and Aboura ( 2020 ), who document the prominent role of volatility risk premium in spillovers among the U.S., U.K., German, and Japanese stock markets. Our result further corroborates several previous studies that find that the realized volatility spillover is stronger than the spillovers in skewness and kurtosis (Cui and Maghyereh 2022 ; Hasan et al 2021 ; Bouri et al 2021d ; Yi et al 2018 ).…”

Blockchain and digital finance

“…They report that there is a moderate liquidity connectedness among six major cryptocurrencies, with Bitcoin and Litecoin playing a significant role concerning the magnitude of connectedness. Moreover, Cui and Maghyereh ( 2022 ) study the higher-order moment co-movements and risk connectedness among cryptocurrencies before and during the COVID-19 pandemic. Lorenzo and Arroyo ( 2022 ) describe, summarize, and segment the main trends of the cryptocurrency market in 2018.…”

“…For example, to extend the study of Hasan et al ( 2022 ), future research may explore the determinants of liquidity connectedness in the cryptocurrency market. To extend Cui and Maghyereh ( 2022 ), future research can investigate the higher-order moment portfolio optimizations of cryptocurrencies. Another promising research direction is to examine the extreme risk connectedness among cryptocurrencies from a time–frequency domain perspective.…”

Are Blockchain-based assets connected to classical markets? Volatility spillover and wavelet analysis

“…On the other hand, other studies have found that these emerging blockchain-based tokens are merely correlated with high volatility in times of crisis, such as during COVID-19 (Maouchi et al, 2022). A pioneering study on DeFi tokens' behavior revealed that they could be considered a distinct asset class from cryptocurrencies (Corbet et al, 2022).…”