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Navigating the storm: Time-frequency quantile dependence and non-linear causality between crypto-currency market volatility and financial instability

Author

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  • Gaies, Brahim
  • Chaâbane, Najeh
  • Bouzouita, Nesrine

Abstract

In this study, we conduct a novel exploration of the time-frequency quantile dynamics between global crypto-currency market volatility and financial instability, using the recently introduced Cryptocurrency VIX indicator from a macro perspective. Taking into account the impact of Covid-19 and the Russian-Ukrainian war shocks, the results from the wavelet coherence analysis, the novel quantile wavelet coherency approach, and the non-parametric causality test reveal a strong dependence between the US financial stress and the volatility of the global cryptocurrency market. This dependence is likely to persist over the long-term and in extreme market conditions, but weaken in the short-term. Additionally, the study finds that while cryptocurrencies are not effective for hedging against risks associated with the banking sector and systemic risk, they can be used to hedge against stock market risk in the short term and under stable market conditions. However, the study shows a mutual transmission of financial risk between the stock market and the cryptocurrency market over the medium run. Tested against the alternative method of quantile connectedness, these findings further reaffirm their robustness.

Suggested Citation

  • Gaies, Brahim & Chaâbane, Najeh & Bouzouita, Nesrine, 2024. "Navigating the storm: Time-frequency quantile dependence and non-linear causality between crypto-currency market volatility and financial instability," The Quarterly Review of Economics and Finance, Elsevier, vol. 93(C), pages 43-70.
    • Handle: RePEc:eee:quaeco:v:93:y:2024:i:c:p:43-70
    DOI: 10.1016/j.qref.2023.11.007
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    More about this item

    Keywords

    Time and frequency connectedness; Macro-financial instability; Global crypto-market;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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