Volatility Interdependence Between Cryptocurrencies, Equity, and Bond Markets

Abstract

This paper investigates (i) the return-volatility spillover between Bitcoin, Ethereum, Ripple, and Litecoin, (ii) the interdependence between cryptocurrencies’ volatility and the US equity and bond markets’ volatility, and (iii) the impact of the Covid-19 outbreak on the cryptocurrencies’ return-volatility. A two-step estimation approach is considered where Univariate General Autoregressive Conditional Heteroskedastic models are estimated to model the volatility of the four cryptocurrencies then a Simultaneous Equation Model is estimated to model the interconnection between the cryptocurrency volatilities, the US equity and bond markets’ volatility, and Covid-19 outbreak. We show that return-volatility spillovers exist among Bitcoin, Ethereum, and Litecoin while Ripple is the main transmitter of shocks. We find that the cryptocurrency market is detached from the US stock market but not from the US bond market. Finally, we show that a high economic and financial uncertainty in the US stock market due to pandemic outbreaks affects the price of Litecoin, Bitcoin, and Ethereum. However, shocks are short-lived. Our findings have practical implications; as the evidence of volatility spillovers among cryptocurrencies and their relative isolation from the majority of mainstream assets should be factored into the valuation and portfolio diversification strategies of investors. In crisis times such as those induced by Covid-19, investors who seek protection from downward movements in bond markets could benefit from taking a position in Ethereum. Policymakers can also rely on our findings to time their intervention to stabilize markets and control uncertainties inherent to stressful periods.

New Evidence on Spillovers Between Crypto Assets and Financial Markets

“…On the other hand, Fang et al (2019) identify weak and insignificant correlations with stock market returns but significant spillovers with the US dollar, gold, and oil. More recently, Harb et al (2022) conclude that the crypto market is detached from the US stock market but not from the US bond market.…”

Effect of Monetary Policy Decisions and Announcements on the Price of Cryptocurrencies: An Elastic-Net With Arima Residuals Approach

“…The initial focus pertains to the multifaceted dimensions intrinsic to cryptocurrencies. This encompasses an examination of the efficacy of the cryptocurrency market (Bariviera, 2017;Nadarajah & Chu, 2017;Tiwari et al, 2018;Urquhart, 2016;Vidal-Tomás & Ibañez, 2018;Wei, 2018), the segregation of cryptocurrencies from other financial and speculative instruments (Bhanja et al, 2023;Bhuiyan et al, 2021;Corbet et al, 2018;Harb et al, 2022), patterns of price and volatility clustering (Baig et al, 2019;Hu et al, 2019;Li et al, 2020;Ma & Tanizaki, 2022;Urquhart, 2017;Zhang et al, 2018), the emergence and consequences of price bubbles (Cheah & Fry, 2015;Choi & Jarrow, 2022;Hayes, 2018;Moosa, 2020;Su et al, 2018), regulatory frameworks surrounding cryptocurrencies (Corbet et al, 2019;Monrat et al, 2019;Pieters & Vivanco, 2017;Schaupp et al, 2022), and the prevalence of fraudulent activities (Bartoletti et al, 2020;Nghiem et al, 2021;Shayegan et al, 2022).…”