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Nonlinear dependence and spillovers between cryptocurrency and global/regional equity markets

Waqas Hanif, Jose Areola Hernandez, Victor Troster (), Sang Hoon Kang and Seong-Min Yoon ()

Pacific-Basin Finance Journal, 2022, vol. 74, issue C

Abstract: In this paper, we investigate the nonlinear dependence dynamics among eight cryptocurrencies (Monero, Bitcoin, Dash, Litecoin, Stellar, XRP, Ethereum, and Nem) by applying time-varying copulas. We also examine the upside and downside spillovers between cryptocurrencies and equity markets by a conditional Value-at-Risk (CoVaR) approach. We show that the dynamics of dependence of the portfolio of cryptocurrencies reveal both symmetric and asymmetric features, with the symmetric dynamics being more predominant. NEM and Ethereum have the largest downside and upside CoVaR spillovers on the world equity index, respectively. The largest downside CoVaR spillovers from the world equity index are to NEM followed by Stellar, and the largest upside spillovers are to Ethereum followed by NEM. Stellar and Bitcoin exhibit the largest downside and upside CoVaR spillovers on the Americas equity index. The largest downside CoVaR spillovers from the Americas equity index are to Stellar and NEM, and those on the upside are to Ethereum and NEM. In addition, we find that most cryptocurrencies exhibit safe haven or hedge properties more often than rare metals and diamonds for daily equity indices. Finally, we conduct an out-of-sample analysis of optimal-weighting portfolio strategies based on C-vine copulas using cryptocurrencies and equity indices that entails forward-looking measures of risk that are economically significant, which outperform benchmark strategies.

Keywords: Cryptocurrency; Copula; Conditional value-at-risk; Equity market; Nonlinear dependence; Spillover (search for similar items in EconPapers)
JEL-codes: C58 D85 F36 G11 G21 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.pacfin.2022.101822

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