Volatility spillovers among G7, E7 stock markets and cryptocurrencies

Abstract

PurposeThe existence of long memory and persistent volatility characteristics of cryptocurrencies justifies the investigation of return and volatility/shock spillovers between traditional financial market asset classes and cryptocurrencies. The purpose of this paper is to investigate the dynamic relationship between the cryptocurrencies, namely Bitcoin and Ethereum, and stock market indices of G7 and E7 countries to analyze the return and volatility spillover patterns among these markets by means of multivariate (MGARCH) approach.Design/methodology/approachApplying the newly developed VAR-GARCH-in mean framework with the BEKK representation, the empirical results reveal that there exists an evidence of mean and volatility spillover effects among Bitcoin and Ethereum as the proxies for the cryptocurrencies, and stock markets reviewed.FindingsInterestingly, the direction of the return and volatility spillover effects is unidirectional in most E7 countries, but bidirectional relationship was found in most G7 countries. This can be explained as the presence of a strong return and volatility interaction among G7 stock markets and crypto market.Originality/valueOverall, the results of this study are of particular interest for portfolio management since it provides insights for financial market participants to make better portfolio allocation decisions. It is also increasingly important to understand the volatility transmission mechanism across these markets to provide policymakers and regulatory bodies with guidance to eliminate the negative impact of cryptocurrency's volatility on the stability of financial markets.

Quantifying Return and Volatility Spillovers among Major Cryptocurrencies: A VAR-BEKK-GARCH Analysis

“…Only a few of these studies considered volatility spillover and shock transmission effects, and there is a clear need for more studies that investigate the volatility spillovers between cryptocurrencies and financial assets (Bouri et al, 2018). On the other hand, the studies that investigated spillovers between these financial assets and cryptocurrencies concluded that there are bidirectional volatility spillovers between Bitcoin and S&P 500 (Ghorbel and Jeribi, 2021), bidirectional volatility spillovers between Bitcoin and MSCI emerging markets (Bouri et al, 2018), unidirectional spillovers between Bitcoin and FTSE 100 (Aydoğan et al, 2022) and unidirectional spillovers between Bitcoin and Nikkei 225 (Van de Klashorst, 2018). When cryptocurrencies and stock markets are compared, the presence of return and shock spillovers suggest the movement of investors across markets; searching for alternative assets or exiting current stocks where Bitcoin is often perceived as an alternative asset.…”

Interdependency Between Indian and US Market Indices: A Granger Causality Approach

“…Moreover, based on the identified connectedness among the financial markets globally, recent researchers conducted a study on the dynamic linkages between macroeconomic variables and stock markets across the globe. The studies use advanced econometric techniques such as VAR-GARCH-BEKK, GVAR, GARCH-BEKK, BEKK-MGARCH, and others to identify dynamic linkages such as spillover effect, contagion, shock transmission, and so on [2,16,21]. But there is no superior model due to varied market conditions [17].…”

“…A few studies are also being conducted on identifying the linkages between the crypto-currency market and the stock market [2,16,32]. The studies suggested a link between stock market returns and cryptocurrency.…”

“…According to several studies that looked at group stock markets, there is a significant interconnectedness between the stock markets (cf. [2,9,16,26]). The results of Forbes and Rigobon's [13] study, which found both long-and short-term connectedness among the stock markets, support the market's interconnectedness.…”

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

“…As per the data from coinmarketcap.com, as of August 2022, a total of 20,679 cryptocurrencies across 513 exchanges have surpassed a market capitalization of over $1,023bn. Despite the inherent risk and uncertainty associated with the cryptocurrency market, it is starting to draw interest from investors as a new financial investment tool (Aydo gan et al, 2022). Because of several factors, including the potential high returns, the absence of onerous government rules and the decentralized nature.…”