Cryptocurrency bubble risk and the FOMC announcements during COVID-19 black swan event

Abstract

Purpose After the COVID-19 outbreak, the Federal Reserve has undertaken several monetary policies to alleviate the pandemic consequences on the markets. This paper aims to evaluate the effects of the Federal Reserve monetary policy on the cryptocurrency dynamics during the COVID19 pandemic. Design/methodology/approach We examine the response and feedback effects via an event study methodology. For this purpose, abnormal returns (AR) and cumulative abnormal returns (CARs) around the first FOMC (Federal Open Market Committee) announcement related to the COVID-19 pandemic for the top five cryptocurrencies are explored. We, further investigate the effect of the eight FOMC statement announcements during the COVID19 pandemic on these cryptocurrencies (Bitcoin, Ethereum, Tether, Litecoin, and Ripple). In the above-mentioned crypto-currency markets, we investigate the presence of bubbles by using the PSY test. We then examine the concordance of the dates of these bubbles with the dates of the FOMC announcements. Findings The empirical results show that the first FOMC event has a negative significant effect after 4 days of the announcement date for all studied cryptocurrencies except Tether. The results also indicate that cumulative abnormal returns are significant during the event windows of (−3,8), (−3,9), and (−3,10). Besides, we find that Bitcoin, Ethereum and, Litecoin lived short bubbles lasting for a few days. However, Ripple and Tether markets present no bubbles and no explosive periods. Research limitations/implications This paper presents trained proof that FOMC announcements have a positive effect on volatility's predictive capacity. This work therefore promotes the study of the data quality of volatility in future research as well. Practical implications The justified effect of the FOMC announcements on cryptocurrency as a speculative asset has practical implications for investors in building their trading strategies in anticipation of the next FOMC announcement. Therefore, this study implies that the FOMC announcements contain very relevant information for investors in the cryptocurrency market. This research may not only encourage a better understanding of the evolution of the expectations of policymakers, but also facilitate a better understanding of how these expectations are developed. Originality/value The COVID-19 pandemic has disturbed the stability of financial markets, inciting the Fed to take some monetary regulations. To the best of our knowledge, this study is the first one that analyses the response of five major cryptocurrencies to FOMC announcements during COVID 19 pandemic and associates these dates with bubble occurrences.

Resilience of Islamic cryptocurrency markets to Covid-19 shocks and the Federal Reserve policy

“…These findings are consistent with the results of the majority of studies on conventional market bubbles during the COVID-19 pandemic, such as the work of Gharib et al (2021), who found that several conventional market bubbles mark this period. These findings are also consistent with Jarboui and Mnif (2021) study, which detected several short-lived bubbles in cryptocurrency markets during the COVID-19 pandemic.…”

“…They were primarily concerned with verifying the impact of these incidents on cryptocurrency volatility. They looked at how monetary and macroeconomic policy announcements can affect Bitcoin prices by using an event analysis approach to justify these connections (Jarboui and Mnif, 2021). Previous financial market research has largely focused on market performance (Fama, 1970;Fama and French, 1998) to detect the presence of bubbles (Fry and Cheah, 2016).…”

“…The lack of metrics in measuring fundamental value in traditional cryptocurrency assets is a common theme in most studies (Chen and Hafner, 2019). They illustrated speculative properties in cryptocurrencies (Baur et al, 2018) and justified the presence of market bubbles (Cheah and Fry, 2015;Jarboui and Mnif, 2021). In 2009, Taylor highlighted the contribution of the monetary policy in the creation of bubbles between 2001 and 2004.…”

Investor behavior and cryptocurrency market bubbles during the COVID-19 pandemic

“…Recently, the wild fluctuations in cryptocurrency prices, especially in Bitcoin, have gained the attention of mainstream financial research. Some have investigated the transitory effects caused by the COVID-19 pandemic to explain this phenomenon (Caferra and Vidal-Tom as, 2021), while others have focused on identifying the date stamping of these markets' bubbles (Jarboui and Mnif, 2021). Explaining the sources of exceptional cryptocurrency price', dynamics is of great importance for policy and trading decisions.…”