Resilience of Islamic cryptocurrency markets to Covid-19 shocks and the Federal Reserve policy

• Published in: AJAR (Asian Journal of Accounting Research) (Online) 2022-02, Vol.7 (1), p.59-70
• Main Authors: Mnif, Emna, Jarboui, Anis
• Format: Article
• Language: English
• Subjects: Central banks; Coronaviruses; COVID-19; Digital currencies; Efficiency; fomc announcements; Hypotheses; Investments; islamic cryptocurrency; Macroeconomics; market bubbles; Medical research; Monetary policy; Pandemics; Prices; psy tests; Securities markets
• ISSN: 2443-4175; 2443-4175
• DOI: 10.1108/AJAR-01-2021-0004

PurposeAfter the COVID-19 outbreak, the Federal Reserve has undertaken several monetary policies to alleviate the pandemic consequences on the stock markets leading to a misunderstanding on the cryptocurrency market response. This paper aims to evaluate the effects of the Federal Reserve monetary policy on the Islamic and conventional cryptocurrency dynamics during the COVID-19 pandemic. We, specifically, examine the associate bubbles and feedbacks effects.Design/methodology/approachThis paper developed a novel methodology that detects market bubbles using the statistical indicators defined by Psychological (PSY) tests. It also investigated the effect of the Federal Open Market Committee (FOMC) announcements on conventional and Islamic cryptocurrencies compatible with Islamic laws “Shari’ah” by using the event-driven regression.FindingsThe empirical results show that the FOMC announcements have a positive significant effect after one day of the event and a negative effect before two days of the announcement on the conventional cryptocurrency markets. However, the reaction of Islamic cryptocurrencies to these events is not significant except for Hello Gold after one day of the announcement. Besides, the Hello Gold and X8X cryptocurrencies present no bubbles during this period. However, Bitcoin and Ethereum markets have short-lived bubbles.Research limitations/implicationsThe main contribution of this study is the investigation of the response and vulnerability to pandemic shocks of a new category of cryptocurrencies backed by tangible assets. This work has practical implications as it provides new insights into trading opportunities and market reactions.Originality/valueTo our knowledge, this work is the first study that compares the response of Islamic and conventional cryptocurrency markets to FOMC announcements during the COVID-19 pandemic and examines the presence of bubbles in these markets. Besides, the originality of this work is derived from the novelty of the data employed and the method used (PSY tests) in this study.