Information Flow between Global Equities and Cryptocurrencies: A VMD‐Based Entropy Evaluating Shocks from COVID‐19 Pandemic

Abstract

The world has witnessed the adverse impact of the COVID-19 pandemic. Accordingly, it is expected that information transmission between equities and digital assets has been altered due to the hostile impact of the pandemic outbreak on financial markets. As a result, the ensuing perverse risk among markets is presumed to rise during severe uncertainties occasioned by the COVID-19 pandemic. The impetus of this study is to examine the degree of asymmetry and nonlinear directional causality between global equities and cryptocurrencies in the frequency domain. Hence, we employ both the variational mode decomposition (VMD) and the Rényi effective transfer entropy techniques. Analyses of the study are presented for three sample periods; these are the full sample period, the pre-COVID-19 period, and the COVID-19 pandemic period. We gauge a mixture of asymmetric and nonlinear bidirectional and unidirectional causality between global equities and cryptocurrencies for the sample periods. However, the COVID-19 pandemic period appears to be driving the estimates for the full sample period, which indicates a negative flow. Thus, the direction and significance of the information flow between the markets for the full sample correspond to the one observed during the COVID-19 pandemic period. We, consequently, establish a significant directional, dynamical, and scale-dependent information flow between global equities and cryptocurrencies. Notwithstanding, throughout the study samples, we mainly find a negative significant information flow from global equities to cryptocurrencies. We detect that most cryptocurrencies exhibit similar behaviour of information flow to global equities for each of the sample periods. The outcome provides pertinent signals to investors with diverse investment horizons who would want to diversify, hedge, or employ cryptocurrencies as a safe haven for global equities during uncertainties, specifically the COVID-19 pandemic.

Spillovers and contagion between BRIC and G7 markets: New evidence from time-frequency analysis

“…However, the reason for the less connectivity of both regions in the COVID-19 pandemic period is partly attributed to their diverse market structures, price formation, price discovery, transaction and timing cost, information and disclosure etc., elicited by markets participants heightened during the COVID-19 to inhibit market integration. Consequently, the COVID-19 pandemic had an asymmetric rather than analogous impact on most financial markets as divulged by prior studies [ 5 , 11 , 23 , 24 , 34 ] which precipitate into markets segregation. Hence, to some extent, the preserved interdependence between the BRIC and G7 markets in the COVID-19 era may be understood from this direction.…”

“…In a static spillover paradigm, Zhang et al [ 27 ] analyse the connectedness of G7 and BRIC economies. However, the operability of markets and investor behaviour are shown to follow dynamic patterns and, hence, evidence from static connectedness measures may be insufficient for time-based investors operating across the short-, medium-, and long-term periods [ 5 , 11 , 23 – 25 , 34 ]. Analysis of safe-haven assets [ 39 ], risk-aversion comovements [ 40 ], spillovers dynamics between developed and emerging economies, and commodity futures [ 28 ] have all been studied with much emphasis on G7 markets and to some extent, BRIC economies.…”

“…Thus, as the principles of the portfolio selection theory [ 7 ] detail, investors from developed markets–which are known to be more integrated–almost always seek assets from developing and emerging economies–which are relatively less integrated–to maximise (minimise) portfolio returns (risk); this has seen the spillovers between these markets increasing. Economists and experts alike advocate that these spillovers are highly heterogeneous [ 8 – 11 ]. On the one hand, China could lead international markets and has greater contagion pathways into international financial markets.…”

Asymmetric connectedness among S&P 500, crude oil, gold and Bitcoin

“…(2021) argue that there is a substantial association between cryptocurrencies and traditional hedge funds, and that the COVID-19 pandemic has had a significant negative influence on the performance of the hedge funds. Besides, there are many existing studies that have analyzed the time-varying connectedness between Bitcoin and conventional assets (Naeem and Karim, 2021; Asafo-Adjei et al. , 2021; Matkovskyy et al.…”

Financial sector and economic growth amid external uncertainty shocks: Insights into emerging economies

“…It is recommended that policymakers, investors and researchers across the globe should incessantly observe the relationship between financial sector development and economic growth across time while considering adverse shocks from global economic policy uncertainty. To reveal hidden relationships, further studies may apply quantile regression [ 108 ] or transfer entropy [ 109 ] to examine the finance-growth nexus.…”