Does Bitcoin or gold react to financial stress alike? Evidence from the U.S. and China

Abstract

The measurement of the dynamic relationship between financial stress and the financial asset market is in its infancy. To quantify the intrinsic relationship among Bitcoin, gold and the financial stress index (FSI), this paper employs a volatility connectedness framework in the time-frequency domain. This study finds that the volatility spillover is relatively strong over a short-term horizon and sharply increased during uncertain periods. Specifically, we focus on two unexpected shocks, i.e., the immigration crisis and the China-U.S. trade conflict, that greatly affect the short-term and medium-term relationship, respectively, between the FSI and financial asset markets. During periods of uncertainty, the U.S. FSI has a medium-term impact on gold prices, whereas Bitcoin is less influenced by this stress; under normal conditions, the U.S. FSI is a short-term transmitter for Bitcoin whereas the China FSI is a medium-term transmitter for gold. Additionally, Bitcoin is greatly affected by financial stress in the U.S. exchange market and China stock market, and gold is mainly influenced by financial stress in the exchange market from the U.S. These results are important for investors and policymakers making decisions during periods of uncertainty.