The relationship between cryptocurrencies and convention financial market: Dynamic causality test and time-varying influence

This paper examines the dynamic causal effect of financial markets on cryptocurrencies from a return perspective by applying the dynamic asymmetric causality tests. Applying daily data from February 1, 2018, to August 31, 2023, this paper also investigates whether the major events, such as COVID-19 or the categories of cryptocurrency, will alter or intensify the existing relationship. The empirical result shows that the causal relationship for both symmetric and asymmetric, between traditional financial markets and cryptocurrency is cyclical and only significant in the short term; such a result is robust with the examination of the VAR-based Granger causality test in the presence of instabilities. The pandemic does not influence the causal relationship, and the gold price had the most significant causal impact on cryptocurrency portfolio returns, while the fluctuations in the stock market had a negligible influence and the two indices did not have different causal impacts on the different types of cryptocurrencies. Adding cryptocurrencies to portfolios with only traditional financial assets can significantly reduce risk.