Regime specific spillover across cryptocurrencies and the role of COVID-19

Tareq Saeed,Elie Bouri,Sang Hoon Kang,Syed Jawad Hussain Shahzad

doi:10.1186/s40854-020-00210-4

Abstract

The aim of this study is to examine the daily return spillover among 18 cryptocurrencies under low and high volatility regimes, while considering three pricing factors and the effect of the COVID-19 outbreak. To do so, we apply a Markov regime-switching (MS) vector autoregressive with exogenous variables (VARX) model to a daily dataset from 25-July-2016 to 1-April-2020. The results indicate various patterns of spillover in high and low volatility regimes, especially during the COVID-19 outbreak. The total spillover index varies with time and abruptly intensifies following the outbreak of COVID-19, especially in the high volatility regime. Notably, the network analysis reveals further evidence of much higher spillovers in the high volatility regime during the COVID-19 outbreak, which is consistent with the notion of contagion during stress periods.

Highlights

Following the appearance of Bitcoin in early 2009 and the ingenuity of its decentralized technology, called blockchain, several altcoins were released, making the cryptocurrency markets a new digital asset class worthy of consideration for investors, regulators, and academics
We study the dynamics of return spillovers among cryptocurrencies with respect to global risk factors (e.g., COVID-19) under two volatility regimes identified using a Markov regime-switching (MS) vector autoregressive (VAR) with exogenous variables model (i.e., MS-VARX)
We capture the changes in return spillovers with respect to global risk factors (e.g., COVID-19) under two volatility regimes identified using a Markov regime-switching (MS) vector autoregressive with exogenous variables (VARX) model

Summary

Introduction

Following the appearance of Bitcoin in early 2009 and the ingenuity of its decentralized technology, called blockchain, several altcoins were released, making the cryptocurrency markets a new digital asset class worthy of consideration for investors, regulators, and academics. Earlier studies look at the technological and legal aspects of Bitcoin and other leading cryptocurrencies (Folkinshteyn and Lennon 2016), while later studies consider the economics and finance (e.g., Bouri et al 2017; Ji et al 2018; Shahzad et al 2019; Kristjanpoller et al 2020) They mainly focus on price formation by examining factors such as attractiveness (Kristoufek 2013), trading volume (Balcilar et al 2017), and economic and financial variables.. The dynamics of spillover depend on two distinct regimes, a high volatility regime during crisis periods and a low volatility regime during stable periods (BenSaïda et al 2018; Reboredo and Ugolini 2020) While this has been applied to conventional assets and financial markets (BenSaïda et al 2018; Reboredo and Ugolini 2020), it remains understudied in the cryptocurrency markets

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