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Cryptocurrency market contagion: Market uncertainty, market complexity, and dynamic portfolios

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  • Antonakakis, Nikolaos
  • Chatziantoniou, Ioannis
  • Gabauer, David

Abstract

In this study, we employ a TVP-FAVAR connectedness approach in order to investigate the transmission mechanism in the cryptocurrency market. To this end, we concentrate on the top 9 cryptocurrencies by virtue of market capitalization and one market factor – based on 45 additional digital currencies – capturing the co-movements in the cryptocurrency market. The period of study spans between August 7, 2015 and May 31, 2018. We find that the dynamic total connectedness across several cryptocurrencies exhibits large dynamic variability ranging between 25% and 75%. In particular, periods of high (low) market uncertainty correspond to strong (weak) connectedness. We show that these results could be explained on the basis of increased market uncertainty that is associated with periods of highly volatile prices. In addition, despite the fact that Bitcoin still influences the cryptocurrency market substantially, we note that, recently, Ethereum has become the number one net transmitting cryptocurrency. We further note that the market gradually becomes more complex considering our connectedness approach and that this might be attributed to the unique characteristics and possibilities inherent in the technology of each cryptocurrency. A simplified application concentrating on bivariate portfolios is indicative of potential hedging opportunities using dynamic hedge ratios and dynamic portfolio weights.

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  • Antonakakis, Nikolaos & Chatziantoniou, Ioannis & Gabauer, David, 2019. "Cryptocurrency market contagion: Market uncertainty, market complexity, and dynamic portfolios," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 61(C), pages 37-51.
  • Handle: RePEc:eee:intfin:v:61:y:2019:i:c:p:37-51
    DOI: 10.1016/j.intfin.2019.02.003
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    More about this item

    Keywords

    Cryptocurrencies; Connectedness; Contagion; TVP-FAVAR;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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