Abstract
This paper investigates the time-varying co-movements in cryptocurrency market, employing a Dynamic Equicorrelation GARCH (DECO-GARCH) model, before and during the COVID-19 pandemic. Our results suggest that the equicorrelations are time-varying and highly responsive to major events, such as hacker attacks and government bans. The results lend support to the recent claim that interlinkages among cryptocurrencies have become stronger, particularly after mid-2017, with substantially increased trading activity in the market. The equicorrelations reach their peak in March 2020, after the official declaration of the World Health Organization (WHO) that novel coronavirus outbreak becomes a global pandemic, indicating potential contagion effects. We also examine the determinants of the market linkages and find that increased Bitcoin trading volume, attention-driven demand for Bitcoin and risk aversion significantly increase the equicorrelations during the COVID-19 bear market. Our results provide potential implications for investors, traders and policy makers and help improve their understanding of the cryptocurrency market’s behavior during times of extreme market stress.
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