CRYPTOCURRENCIES AND G7 CAPITAL MARKETS INTEGRATE IN PERIODS OF EXTREME VOLATILITY?

Nicole Horta; Rui  Dias; Catarina Revez; Paulo Alexandre; Paula Heliodoro

doi:10.5937/jpmnt10-41491

Nicole Horta School of Business and Administration, Polytechnic Institute of Setúbal, Setúbal, Portugal https://orcid.org/0000-0003-0879-6691
Rui Dias School of Business and Administration, Polytechnic Institute of Setúbal, Setúbal, Portugal https://orcid.org/0000-0002-6138-3098
Catarina Revez School of Business and Administration, Polytechnic Institute of Setúbal, Setúbal, Portugal
Paulo Alexandre School of Business and Administration, Polytechnic Institute of Setúbal, Setúbal, Portugal https://orcid.org/0000-0002-7420-6517
Paula Heliodoro School of Business and Administration, Polytechnic Institute of Setúbal, Setúbal, Portugal https://orcid.org/0000-0002-7420-6517

DOI: https://doi.org/10.5937/jpmnt10-41491

Sažetak

The purpose of this study is to examine the synchronism between the US capital markets (DJ, S&P 500), the United Kingdom (FTSE 100), Canada (S&P/TSX), Germany (DAX 30), France (CAC 40), Japan (Nikkei 225), Italy (Italy Ds Market and major cryptocurrencies such as Bitcoin (BTC), Litecoin (LTC), Ethereum (ETH), and the Crypto 10 index, from February 2018 to November 2021. Based on the findings, we found that BTC and ETH cryptocurrencies drastically reduced their level of integration with their peers over the 2020 worldwide pandemic era, whereas LTC maintained. We also discovered that the Dow Jones, S&P 500, and DAX 30 stock indexes lowered their level of integration when compared to the pre-covid subperiod. For the UK capital market (FTSE 100), Canada (S&P/TSX), Japan (Nikkei 225), France (CAC 40), and Italy (Italy Ds Market) the level of integration increased significantly. These findings support, in part, our research question, that during periods of stress and uncertainty in the global economy capital markets tend towards integration, thus calling into question the hypothesis of efficient portfolio diversification.

Reference

Aldawsari, H., & Alnagada, A. (2020). Coronavirus Economic Effects on the Seven Largest Advanced Economies in the World (G7). SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3613725

Baur, D. G., Hong, K. H., & Lee, A. D. (2018). Bitcoin: Medium of exchange or speculative assets? Journal of International Financial Markets. Institutions and Money, 54, 177–189. https://doi.org/10.1016/j.intfin.2017.12.004

Berentsen, A., & Schar, F. (2018). A Short Introduction to the World of Cryptocurrencies. Review, 100(1), 1–19. https://doi.org/10.20955/r.2018.1-16

Bhattacharyya, R. (2019). The Gains and Pains of Financial Integration and Trade Liberalization (R. Bhattacharyya (ed.)). Emerald Publishing Limited. https://doi.org/10.1108/9781789739992

Bouri, E., Das, M., Gupta, R., & Roubaud, D. (2018). Spillovers between Bitcoin and other assets during bear and bull markets. Applied Economics, 50(55), 5935–5949. https://doi.org/10.1080/00036846.2018.1488075

Corbet, S., Meegan, A., Larkin, C., Lucey, B., & Yarovaya, L. (2018). Exploring the dynamic relationships between cryptocurrencies and other financial assets. Economics Letters, 165, 28–34. https://doi.org/10.1016/j.econlet.2018.01.004

Dias, R., da Silva, J. V., & Dionísio, A. (2019). Financial markets of the LAC region: Does the crisis influence the financial integration? International Review of Financial Analysis, 63(January), 160–173. https://doi.org/10.1016/j.irfa.2019.02.008

Dias, R. T., Pardal, P., Santos, H., & Vasco, C. (2021). COVID-19 Pandemic and Its Influence on Safe Havens. June, 289–303. https://doi.org/10.4018/978-1-7998-6926-9.ch016

Dyhrberg, A. H. (2016). Hedging capabilities of bitcoin. Is it the virtual gold? Finance Research Letters, 16, 139–144. https://doi.org/10.1016/j.frl.2015.10.025

Gaio, L. E., Ambrozini, M. A., Bonacim, C. A. G., & Pimenta Junior, T. (2014). Interdependência entre os mercados mundiais de ações: uma análise de volatilidades. BASE - Revista de Administração e Contabilidade Da Unisinos, 11(3). https://doi.org/10.4013/base.2014.113.07

Gil-Alana, L. A., Abakah, E. J. A., & Rojo, M. F. R. (2020). Cryptocurrencies and stock market indices. Are they related? Research in International Business and Finance, 51(July 2019), 101063. https://doi.org/10.1016/j.ribaf.2019.101063

Gregory, A. W., & Hansen, B. E. (1996). Tests for cointegration in models with regime and trend shifts. Oxford Bulletin of Economics and Statistics, 58(2), 555–560. https://doi.org/10.1111/j.1468-0084.1996.mp58003008.x

Horta, N., Dias, R., Revez, C., Heliodoro, P., & Alexandre, P. (2022). Spillover and Quantitative Link Between Cryptocurrency Shocks and Stock Returns: New Evidence From G7 Countries. Balkans Journal of Emerging Trends in Social Sciences, 5(1), 1–14. https://doi.org/10.31410/balkans.jetss.2022.5.1.1-14

Huang, X., Han, W., Newton, D., Platanakis, E., Stafylas, D., & Sutcliffe, C. (2022). The diversification benefits of cryptocurrency asset categories and estimation risk: pre and post Covid-19. European Journal of Finance. https://doi.org/10.1080/1351847X.2022.2033806

Jarque, C. M., & Bera, A. K. (1980). Efficient tests for normality, homoscedasticity and serial independence of regression residuals. Economics Letters, 6(3), 255–259. https://doi.org/10.1016/0165-1765(80)90024-5

Jiang, W., Xu, Q., & Zhang, R. (2022). Tail-event driven network of cryptocurrencies and conventional assets. Finance Research Letters, 46. https://doi.org/10.1016/j.frl.2021.102424

Kantaphayao, W., & Sukcharoensin, S. (2021). Cointegration and Dynamic Spillovers between Cryptocurrencies and Other Financial Assets. Southeast Asian Journal of Economics, 9(3).

Kotu, V., & Deshpande, B. (2019). Classification. In Data Science (Vol. 51, Issue 8, pp. 65–163). Elsevier. https://doi.org/10.1016/B978-0-12-814761-0.00004-6

Letho, L., Chelwa, G., & Alhassan, A. L. (2022). Cryptocurrencies and portfolio diversification in an emerging market. China Finance Review International, 12(1). https://doi.org/10.1108/CFRI-06-2021-0123

Liu, W. (2019). Portfolio diversification across cryptocurrencies. Finance Research Letters, 29. https://doi.org/10.1016/j.frl.2018.07.010

Meshcheryakov, A., & Ivanov, S. (2020). Ethereum as a hedge: The intraday analysis. Economics Bulletin, 40(1), 101–108.

Nawawi, A., Makarov, I., Schoar, A., Caporale, G. M., Gil-Alana, L., Plastun, A., Fry, J., Cheah, E. T., Swee, E. G., Yi-, C., Gin, E., Teo, S., Bommes, E., Härdle, W. K., Park, S., Oh, S., Kim, H., Akar, S., Akar, E., … Baronchelli, A. (2019). Conference Paper • August 2018. Finance Research Letters, 11(2).

Pardal, P., Dias, R. T., Santos, H., & Vasco, C. (2021). Central European Banking Sector Integration and Shocks During the Global Pandemic (COVID-19). June, 272–288. https://doi.org/10.4018/978-1-7998-6926-9.ch015

Pavković, A., Andelinović, M., & Pavković, I. (2019). Achieving Portfolio Diversification through Cryptocurrencies in European Markets. Business Systems Research, 10(2). https://doi.org/10.2478/bsrj-2019-020

Tsay, R. S. (2005). Analysis of Financial Time Series. In Technometrics (Vol. 48, Issue 2). https://doi.org/10.1198/tech.2006.s405

Wang, J., Xue, Y., & Liu, M. (2016). An Analysis of Bitcoin Price Based on VEC Model. Icemi, 146–152. https://doi.org/10.2991/icemi-16.2016.36