Interlinkages of cryptocurrency and stock markets during the COVID-19 pandemic by applying a QVAR model

Abstract

PurposeThis paper aims to study the interlinkages between cryptocurrency and the stock market by characterizing their connectedness and the effects of the COVID-19 crisis on their relations.Design/methodology/approachThe author employs a quantile vector autoregression (QVAR) to identify the connectedness of nine indicators from January 1, 2018, to December 31, 2021, in an effort to examine the relationships between cryptocurrency and stock markets.FindingsThe results demonstrate that the pandemic shocks appear to have influences on the system-wide dynamic connectedness. Dynamic net total directional connectedness implies that Bitcoin (BTC) is a net short-duration shock transmitter during the sample. BTC is a long-duration net receiver of shocks during the 2018–2020 period and turns into a long-duration net transmitter of shocks in late 2021. Ethereum is a net shock transmitter in both durations. Binance turns into a net short-duration shock transmitter during the COVID-19 outbreak before receiving net shocks in 2021. The stock market in different areas plays various roles in the short run and long run. During the COVID-19 pandemic shock, pairwise connectedness reveals that cryptocurrencies can explain the volatility of the stock markets with the most severe impact at the beginning of 2020.Practical implicationsInsightful knowledge about key antecedents of contagion among these markets also help policymakers design adequate policies to reduce these markets' vulnerabilities and minimize the spread of risk or uncertainty across these markets.Originality/valueThe author is the first to investigate the interlinkages between the cryptocurrency and the stock market and assess the influences of uncertain events like the COVID-19 health crisis on the dynamic interlinkages between these two markets.

Can diversification be improved by using cryptocurrencies? Evidence from Indian equity market

“…The Jarque-Bera (J&B) test is significant at the 1% level for all series, confirming that they are not normally distributed, that the majority are negatively skewed, and that they all follow a leptokurtic distribution. The above descriptive statistics associated with stocks and cryptocurrencies exhibit a partial match with findings from the same domain research conducted by Maitra et al (2022), Aydo gan et al (2022, Yen and Ha (2023) and Soltani et al (2023) The Ljung and Box (Q) and (Q 2 ) tests are performed to test the first and second moments dependencies for the return series. Most of the return series show significant (Q) statistics, which signify the presence of serial correlation.…”

“…Furthermore, studies comparing the link between equities and cryptocurrencies in pre-crisis and crisis times, as well as the volatility spillover, have rarely been undertaken (Jeribi and Manzli, 2020;Maitra et al, 2022). Aside from these, current research findings depend on OLS, VAR and wavelet-like approaches (Jeribi and Manzli, 2020;Annamalaisamy and Jayaraman, 2023;Yen and Ha, 2023), none of which give portfolio weighting or hedging effectiveness for cryptocurrencies in stock portfolios. Moreover, a few studies, such as JFEP 15,6 Jeribi et al (2021), Majumder (2022) and Jana et al (2023), emphasize the Indian context.…”

“…The ongoing financial crisis due to the dual effects of the pandemic and war has adversely impacted the global financial system (Frikha et al , 2023) and indubitably increased volatility in financial assets, including stocks and cryptocurrencies (Sharif et al , 2020; Maitra et al , 2022; Yen and Ha, 2023). However, previous studies have proved the resilience of cryptocurrencies for the long term in the financial mainstream and considered them a core investment asset of the current century (Aydoğan et al , 2022).…”

“…And during wartime, stock markets led the majority of cryptocurrencies. In the same way, using the QVAR model, Yen and Ha (2023) have examined the interlinkages between stocks and cryptocurrencies during the COVID health crisis. Researchers have shown that the dynamic interconnectivity of stocks and cryptocurrencies differs on short- and long-term scales in response to pandemic shocks.…”

“…But after an election, the Bitcoin returns have increased with increasing political risk. Furthermore, a recent study has revealed that volatility spillover from cryptocurrency to stock markets increased during the COVID era compared to pre-COVID (Maitra et al , 2022; Ha, 2022; Yen and Ha, 2023). Jana et al (2023) have shown stock and cryptocurrency returns have high volatility and persistence in the long run.…”