Abstract
The world has witnessed the adverse impact of the COVID-19 pandemic. Accordingly, it is expected that information transmission between equities and digital assets has been altered due to the hostile impact of the pandemic outbreak on financial markets. As a result, the ensuing perverse risk among markets is presumed to rise during severe uncertainties occasioned by the COVID-19 pandemic. The impetus of this study is to examine the degree of asymmetry and nonlinear directional causality between global equities and cryptocurrencies in the frequency domain. Hence, we employ both the variational mode decomposition (VMD) and the Rényi effective transfer entropy techniques. Analyses of the study are presented for three sample periods; these are the full sample period, the pre-COVID-19 period, and the COVID-19 pandemic period. We gauge a mixture of asymmetric and nonlinear bidirectional and unidirectional causality between global equities and cryptocurrencies for the sample periods. However, the COVID-19 pandemic period appears to be driving the estimates for the full sample period, which indicates a negative flow. Thus, the direction and significance of the information flow between the markets for the full sample correspond to the one observed during the COVID-19 pandemic period. We, consequently, establish a significant directional, dynamical, and scale-dependent information flow between global equities and cryptocurrencies. Notwithstanding, throughout the study samples, we mainly find a negative significant information flow from global equities to cryptocurrencies. We detect that most cryptocurrencies exhibit similar behaviour of information flow to global equities for each of the sample periods. The outcome provides pertinent signals to investors with diverse investment horizons who would want to diversify, hedge, or employ cryptocurrencies as a safe haven for global equities during uncertainties, specifically the COVID-19 pandemic.
Highlights
Introduction e advent of the COVID19 pandemic has induced many empirical studies on economies, including its impact on mental health [1], food prices [2], interdependencies between COVID-19 and exchange rates in Wuhan [3], COVID-19 and Bitcoin [4], the nexus between equities and cryptocurrencies [5], crude oil and agricultural futures [6], major world markets [7], and mutual information between markets [8], among others
We initially present the variational mode decomposition (VMD) technique, followed by the transfer entropy. us, the outcome generated from the VMD is used as input data for the effective transfer entropy (ETE) estimations
It can be observed from the plots that in the early part of 2020, the price series for all markets trend upwards after a downward spike. at is, the prices of both cryptocurrencies and global equities are experiencing a rapid increase which concurs with the assertion made by Zhang et al [83] of markets rebound later in the COVID-19 periods since most businesses and economies have learnt how to survive
Summary
19 pandemic has induced many empirical studies on economies, including its impact on mental health [1], food prices [2], interdependencies between COVID-19 and exchange rates in Wuhan [3], COVID-19 and Bitcoin [4], the nexus between equities and cryptocurrencies [5], crude oil and agricultural futures [6], major world markets [7], and mutual information between markets [8], among others. Especially stocks, are influenced by several factors [17], the distinct feature of stocks may welcome diversification benefits from cryptocurrencies [15, 18]
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