Stock market reactions to upside and downside volatility of Bitcoin: A quantile analysis

• Published in: The North American journal of economics and finance 2021-07, Vol.57, p.101379, Article 101379
• Main Author: Ahmed, Walid M.A.
• Format: Article
• Language: English
• Subjects: Asymmetry; Bitcoin; Cryptocurrency markets; Quantile regression; Realized volatility measures
• ISSN: 1062-9408; 1879-0860
• DOI: 10.1016/j.najef.2021.101379

•We examine the differential effects of Bitcoin's upside and downside volatility on stock markets.•Developed-market returns are positively sensitive to realized variance across different market states.•Emerging-market returns are positively (negatively) correlated with realized variance in bear (normal and bull) market periods.•The upside (downside) realized variance has a negative (positive) impact on returns of either market category.•The dependence structure is highly asymmetric across the return distribution of either market category. We investigate how sensitive developed and emerging equity markets are to volatility dynamics of Bitcoin during tranquil, bear, and bull market regimes. Intraday price fluctuations of Bitcoin are represented by three measures of realized volatility, viz. total variance, upside semivariance, and downside semivariance. Our empirical analysis relies on a quantile regression framework, after orthogonalizing raw returns with respect to an array of relevant global factors and accounting for structural shifts in the series. The results suggest that developed-market returns are positively related to the realized variance proxy across various market conditions, while emerging-market returns are positively (negatively) correlated with realized variance during bear (normal and bull) market periods. The upside (downside) component of realized variance has a negative (positive) influence on returns of either market category, and the dependence structure is highly asymmetric across the return distribution. Additionally, we document that developed and emerging markets are more sensitive to downside volatility than to upside volatility when they enter tranquil or bull territory. Our results offer practical implications for policymakers and investors.