Dynamics of asymmetric multifractal cross-correlations between cryptocurrencies and global stock markets: Role of gold and portfolio implications

Ling Mei-jun and Cao Guang-xi

Chaos, Solitons & Fractals, 2024, vol. 182, issue C

Abstract: Understanding the risk transmission mechanism between cryptocurrencies and global stock markets is crucial for investors' risk management strategies. This study delves into this relationship, drawing on the Fractal Market Hypothesis and acknowledging the nonlinearity and asymmetry present in financial market correlations. We introduce a combined approach, integrating Multifractal Detrended Partial Cross-Correlation Analysis (MF-DPCCA) and Asymmetric Multifractal Cross-Correlation Analysis (MF-ACCA), resulting in the Asymmetric Multifractal Partial Cross-Correlation Analysis (MF-APCCA) method. By applying this method, we aim to uncover the dynamics between cryptocurrencies and global stock markets. We focus on stock indices from E7 and G7 countries and consider the Bitcoin market for our analysis. Our initial findings, using the MF-ACCA method, reveal pronounced asymmetric cross-correlations between cryptocurrencies and these stock markets. Notably, the correlation strength between Bitcoin and the G7 stock markets surpasses that of Bitcoin and the E7 markets. Further, when we account for and remove the influence of the common factor, gold, our analysis with the MF-APCCA method indicates an enhanced long-memory cross-correlation between Bitcoin and these stock markets. This cross-correlation tends to amplify during periods of positive returns but shows anti-persistence during negative returns. Remarkably, these asymmetries become more pronounced during significant market shifts. When comparing Bitcoin's relationship with the G7 and E7 indices, the latter displays heightened asymmetric risk correlations in both upward and downward market phases. In conclusion, gold, recognized as a safe-haven asset, can serve as a buffer, diminishing the portfolio risk between Bitcoin and the stock market. These empirical findings bear significant weight, urging investors to reassess the intricate relationship between stock and cryptocurrency markets. It also underscores the importance of well-informed cross-market portfolio investments and the need for regulatory vigilance to prevent systemic financial pitfalls.

Keywords: Cryptocurrencies; Global stock markets; Asymmetric Multifractal Partial Cross-Correlation Analysis (MF-APCCA); Risk management (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:chsofr:v:182:y:2024:i:c:s0960077924002911

DOI: 10.1016/j.chaos.2024.114739

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