Regime specific spillover across cryptocurrencies and the role of COVID-19

Abstract

The aim of this study is to examine the daily return spillover among 18 cryptocurrencies under low and high volatility regimes, while considering three pricing factors and the effect of the COVID-19 outbreak. To do so, we apply a Markov regime-switching (MS) vector autoregressive with exogenous variables (VARX) model to a daily dataset from 25-July-2016 to 1-April-2020. The results indicate various patterns of spillover in high and low volatility regimes, especially during the COVID-19 outbreak. The total spillover index varies with time and abruptly intensifies following the outbreak of COVID-19, especially in the high volatility regime. Notably, the network analysis reveals further evidence of much higher spillovers in the high volatility regime during the COVID-19 outbreak, which is consistent with the notion of contagion during stress periods.

High frequency multiscale relationships among major cryptocurrencies: portfolio management implications

“…In addition, causality estimates also reaffirm long-term memory across the cryptocurrencies. Thus, our findings add to earlier observations by Phillip et al ( 2018 , 2019 ), Bouri et al ( 2020a ) and Shahzad et al ( 2021 ).

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“…Bouri et al ( 2021b ) find trading volume and uncertainties as key determinants of market during the increased integration of 12 top cryptocurrencies. Shahzad et al ( 2021 ) analyze how COVID-19 affects the volatility spillover regimes of the daily returns of 18 important cryptocurrencies. High volatility regimes are found to transmit greater spillovers following the onset of the pandemic.…”

Cryptocurrencies and oil price shocks: A NARDL analysis in the COVID-19 pandemic

“…Finally, investors should consider altcoins to achieve more effective diversification despite their lower returns. Shahzad et al (2021) study the daily return spillover among 18 cryptocurrencies under low and high volatility regimes and find strong spillovers across the cryptocurrency markets in low and high volatility regimes, especially during the COVID-19 outbreak. Yousaf and Ali (2020) analyse the return and volatility transmission among the three most popular cryptocurrencies during the pre-COVID-19 and the COVID-19 period and find that volatility transmission is not significant among cryptocurrencies during the pre-COVID-19 period, and thus investors can obtain maximum diversification benefits.…”

Key Roles of Crypto-Exchanges in Generating Arbitrage Opportunities

“…Additionally, it has been argued by [31] that the return and volatility spillover effects tend to reinforce each other, particularly during times of stress. In this regard, the authors of [32] explored regime specific spillover across crypto-currencies and the role of COVID-19 by applying a Markov regime-switching vector autoregressive model with exogenous variables. Their findings show the evidence of greater spillovers in the high volatility regime during the pandemic outbreak, which is in line with the notion of the financial contagion spread during turbulent periods.…”