Exploring the Driving Forces of Stock-Cryptocurrency Comovements during COVID-19 Pandemic: An Analysis Using Wavelet Coherence and Seemingly Unrelated Regression

Ruzita Abdul-Rahim, Airil Khalid, Zulkefly Abdul Karim and Mamunur Rashid
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Ruzita Abdul-Rahim: Faculty of Economics and Management, Universiti Kebangsaan Malaysia, Bangi 43600, Selangor, Malaysia
Airil Khalid: School of Economics, Finance and Banking, Universiti Utara Malaysia, Sintok 06010, Kedah, Malaysia
Mamunur Rashid: Christ Church Business School, Canterbury Christ Church University, North Holmes Road, Canterbury CT1 1QU, UK

Mathematics, 2022, vol. 10, issue 12, 1-19

Abstract: This paper estimates the comovement between two leading cryptocurrencies and the G7 stock markets. It then attempts to explain the comovement with the rational investment theory by examining whether it is driven by market uncertainty measures, public attention to COVID-19, and the government’s containment and health responses to COVID-19. Wavelet Coherence heatmaps show that the stock-cryptocurrency comovements increase significantly and positively during the pandemic, indicating that cryptocurrencies lose their safe haven properties against stocks during the heightened market uncertainties. Over the longer investment horizons, Bitcoin reemerges as a safe haven or strong hedger while Ethereum’s properties weaken. Seemingly Unrelated Regression results reveal that the stock-cryptocurrency comovements are rationally explained by market uncertainties, government responses to COVID-19, and market fundamentals. However, the comovements are also driven by the fear of COVID-19 to a certain extent. Our findings offer valuable insights for investors considering cryptocurrencies to rebalance their equity portfolios during market distress. For policymakers, the Economic Policy Uncertainty (EPU) results suggest that government policies and regulatory frameworks can be used to regulate speculation and investment activities in the cryptocurrency market.

Keywords: containment and Health Index; COVID-19 pandemic; hedge; investor sentiment; market uncertainties; public’s attention; rational investment theory; safe haven; stock-cryptocurrency comovement (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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