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Volatility contagion between cryptocurrencies, gold and stock markets pre-and-during COVID-19: evidence using DCC-GARCH and cascade-correlation network

Author

Listed:
  • Bassam A. Ibrahim

    (Imam Mohammad Ibn Saud Islamic University
    Mansoura University)

  • Ahmed A. Elamer

    (Brunel University London
    Gulf University for Science and Technology (GUST))

  • Thamir H. Alasker

    (Imam Mohammad Ibn Saud Islamic University)

  • Marwa A. Mohamed

    (Higher Institute for Computer Science and Information Systems)

  • Hussein A. Abdou

    (Mansoura University
    Northumbria University)

Abstract

The rapid rise of Bitcoin and its increasing global adoption has raised concerns about its impact on traditional markets, particularly in periods of economic turmoil and uncertainty such as the COVID-19 pandemic. This study examines the extent of the volatility contagion from the Bitcoin market to traditional markets, focusing on gold and six major stock markets (Japan, USA, UK, China, Germany, and France) using daily data from January 2, 2011, to June 2, 2022, with 2958 daily observations. We employ DCC-GARCH, wavelet coherence, and cascade-correlation network models to analyze the relationship between Bitcoin and those markets. Our results indicate long-term volatility contagion between Bitcoin and gold and short-term contagion during periods of market turmoil and uncertainty. We also find evidence of long-term contagion between Bitcoin and the six stock markets, with short-term contagion observed in Chinese and Japanese markets during COVID-19. These results suggest a risk of uncontrollable threats from Bitcoin volatility and highlight the need for measures to prevent infection transmission to local stock markets. Hedge funds, mutual funds, and individual and institutional investors can benefit from using our findings in their risk management strategies. Our research confirms the utility of the cascade-correlation network model as an innovative method to investigate intermarket contagion across diverse conditions. It holds significant implications for stock market investors and policymakers, providing evidence for potentially using cryptocurrencies for hedging, for diversification, or as a safe haven.

Suggested Citation

  • Bassam A. Ibrahim & Ahmed A. Elamer & Thamir H. Alasker & Marwa A. Mohamed & Hussein A. Abdou, 2024. "Volatility contagion between cryptocurrencies, gold and stock markets pre-and-during COVID-19: evidence using DCC-GARCH and cascade-correlation network," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 10(1), pages 1-28, December.
    • Handle: RePEc:spr:fininn:v:10:y:2024:i:1:d:10.1186_s40854-023-00605-z
    DOI: 10.1186/s40854-023-00605-z
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    Keywords

    Cryptocurrencies; Gold; Stock markets; COVID-19; Cascade-correlation network;
    All these keywords.

    JEL classification:

    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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