Cryptocurrency market responses to the fed’s quantitative easing: an in-depth TVP-VAR model analysis

Nabil Harir, Zakariae Bel Mkaddem, Hicham Es-Saadi, Imane Tesse and Oumaima Bouayad

Journal of Financial Regulation and Compliance, 2025, vol. 34, issue 2, 259-286

Abstract: PurposeThe purpose of this study is to examine the response of various cryptocurrency market classes to the Federal Reserve’s quantitative easing (QE) announcements.Design/methodology/approachWe used the time-varying parameter vector autoregressive model to analyze the price spillover and interconnectedness between the US market assets/indices, and cryptocurrencies, explicitly focusing on Layer 1 tokens, DeFi tokens, Exchange-Based Tokens, Smart Contracts and Stablecoins.FindingsThe findings reveal that most cryptocurrency classes exhibit notable price spillovers from US assets/indices. However, the analysis suggests that only high-return tokens show significant responses during the Federal Reserve QE announcements and receive price spillover. In contrast, leading tokens remain unaffected by such spillovers, which suggests that during QE periods investors tend to seek higher returns and are more likely to invest in high return assets. It reflects a preference for assets that could offer greater returns when monetary policy is easing while more stable cryptocurrencies are less impacted by policy changes, implying that investors may adjust their strategies by shifting toward high return cryptocurrencies during periods of QE to capitalize on these market movements.Research limitations/implicationsThis study focuses on a limited selection of cryptocurrency classes and specific QE events, which may not fully capture all market dynamics or incorporate newer cryptocurrency assets due to insufficient historical data. Another key limitation of this study is the inclusion of the COVID-19 pandemic period, which represents an extraordinary macroeconomic environment that may not be representative of normal market conditions. Future research could explore a broader range of crypto assets over an extended timeframe and sub-period analysis excluding the pandemic years or incorporate regime-switching models to account for structural breaks.Practical implicationsUnderstanding the response of different cryptocurrency assets to QE announcements can significantly assist investors in making informed decisions regarding asset allocation during these periods, guiding them in identifying the most profitable cryptocurrencies as alternatives to traditional assets.Originality/valueIn contrast to prior research, which primarily concentrates on the impact of QE on financial markets or confines its analysis to major and prominent crypto assets, this study provides a comprehensive examination of how specific cryptocurrency classes respond to macroeconomic policy changes.

Keywords: Quantitative easing; FED; Cryptocurrency; Price spillover; Crypto classes; TVP-VAR model (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfrcpp:jfrc-12-2024-0261

DOI: 10.1108/JFRC-12-2024-0261

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