Discovering interlinkages between major cryptocurrencies using high-frequency data: New evidence from COVID-19 pandemic

Through the application of the VAR-AGARCH model to intra-day data for three cryp-tocurrencies (Bitcoin, Ethereum, and Litecoin), this study examines the return and volatility spillover between these cryptocurrencies during the pre-COVID-19 period and the COVID-19 period. We also estimate the optimal...

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Bibliographic Details
Published in:Financial innovation (Heidelberg) 2020-11, Vol.6 (1), p.1-18, Article 45
Main Authors: Yousaf, Imran, Ali, Shoaib
Format: Article
Language:English
Subjects:
Coronaviruses
COVID-19
Cryptocurrencies
Digital currencies
Economics
Economics and Finance
Hedge ratios
Hedging
Hedging effectiveness
Macroeconomics/Monetary Economics//Financial Economics
Optimal weights
Political Economy/Economic Systems
Return spillover
Volatility spillover
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Summary:Through the application of the VAR-AGARCH model to intra-day data for three cryp-tocurrencies (Bitcoin, Ethereum, and Litecoin), this study examines the return and volatility spillover between these cryptocurrencies during the pre-COVID-19 period and the COVID-19 period. We also estimate the optimal weights, hedge ratios, and hedging effectiveness during both sample periods. We find that the return spillovers vary across the two periods for the Bitcoin-Ethereum, Bitcoin-Litecoin, and Ethereum-Litecoin pairs. However, the volatility transmissions are found to be different during the two sample periods for the Bitcoin-Ethereum and Bitcoin-Litecoin pairs. The constant conditional correlations between all pairs of cryptocurrencies are observed to be higher during the COVID-19 period compared to the pre-COVID-19 period. Based on optimal weights, investors are advised to decrease their investments (a) in Bitcoin for the portfolios of Bitcoin/Ethereum and Bitcoin/Litecoin and (b) in Ethereum for the portfolios of Ethereum/Litecoin during the COVID-19 period. All hedge ratios are found to be higher during the COVID-19 period, implying a higher hedging cost compared to the pre-COVID-19 period. Last, the hedging effectiveness is higher during the COVID-19 period compared to the pre-COVID-19 period. Overall, these findings provide useful information to portfolio managers and policymakers regarding portfolio diversification, hedging, forecasting, and risk management.
ISSN:2199-4730
2199-4730
DOI:10.1186/s40854-020-00213-1