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

Author

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  • Imran Yousaf

    (Air University)

  • Shoaib Ali

    (Air University)

Abstract

Through the application of the VAR-AGARCH model to intra-day data for three cryptocurrencies (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.

Suggested Citation

  • Imran Yousaf & Shoaib Ali, 2020. "Discovering interlinkages between major cryptocurrencies using high-frequency data: new evidence from COVID-19 pandemic," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 6(1), pages 1-18, December.
    • Handle: RePEc:spr:fininn:v:6:y:2020:i:1:d:10.1186_s40854-020-00213-1
    DOI: 10.1186/s40854-020-00213-1
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    More about this item

    Keywords

    Return spillover; Volatility spillover; Cryptocurrencies; Optimal weights; Hedge ratios; Hedging effectiveness; COVID-19;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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