Tail spillover effects between cryptocurrencies and uncertainty in the gold, oil, and stock markets
Date
2023
Authors
Mensi, W.
Gubareva, M.
Ko, H.U.
Vo, X.V.
Kang, S.H.
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Journal article
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Financial Innovation, 2023; 9(92):1-27
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Abstract
This study investigates tail dependence among five major cryptocurrencies, namely Bitcoin, Ethereum, Litecoin, Ripple, and Bitcoin Cash, and uncertainties in the gold, oil, and equity markets. Using the cross-quantilogram method and quantile connectedness approach, we identify cross-quantile interdependence between the analyzed variables. Our results show that the spillover between cryptocurrencies and volatility indices for the major traditional markets varies substantially across quantiles, implying that diversification benefits for these assets may differ widely across normal and extreme market conditions.
Under normal market conditions, the total connectedness index is moderate and falls below the elevated values observed under bearish and bullish market conditions. Moreover, we show that under all market conditions, cryptocurrencies have a leadership influence over the volatility indices. Our results have important policy implications for enhancing financial stability and deliver valuable insights for deploying volatility-based financial instruments that can potentially provide cryptocurrency investors with suitable hedges, as we show that cryptocurrency and volatility markets are insignificantly (weakly) connected under normal (extreme) market conditions.
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Copyright 2023 The Author(s). This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article's Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article's Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. (http://creativecommons.org/licenses/by/4.0/.)