Liquidity spillovers between cryptocurrency and foreign exchange markets

Ramzi Nekhili, Jahangir Sultan and Elie Bouri

The North American Journal of Economics and Finance, 2023, vol. 68, issue C

Abstract: Market liquidity spillover has been studied using fiat and digital currency (cryptocurrency), though separately. In today’s globally connected financial markets, there is interconnectedness among financial assets, as economic agents make decisions involving multiple asset classes. In this paper, we construct daily liquidity measures for five major cryptocurrencies and seven major fiat currencies and examine their interdependence in the time–frequency domain. We find that liquidity connectedness is event-driven and varies with time. Notably, there is an increase in liquidity spillover at the peak of the COVID-19 pandemic, reflecting heightened uncertainty and market instability. We also find that, at the peak of the pandemic, the total spillover index is stronger in the long run than the short run, highlighting a possible flight-to-liquidity during periods of stress. The Euro stands out as the principal net transmitter of liquidity shocks in the short run, while Ethereum plays this role in the long run. Further analysis highlights the role of some economic and financial variables in driving the dynamics of liquidity spillovers and reveals some heterogeneity in the identity of drivers between the short and long run. The results enrich the academic literature by providing evidence of liquidity spillovers between cryptocurrencies and foreign exchange markets during times of stress, which is insightful for traders, investors, and policymakers.

Keywords: Liquidity measure; Time and frequency spillovers; Bitcoin; Cryptocurrency; Fiat currencies; COVID-19 outbreak (search for similar items in EconPapers)
JEL-codes: C40 F36 G15 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S106294082300092X
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:68:y:2023:i:c:s106294082300092x

DOI: 10.1016/j.najef.2023.101969

Access Statistics for this article

The North American Journal of Economics and Finance is currently edited by Hamid Beladi

More articles in The North American Journal of Economics and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().