An investigation of financial contagion between cryptocurrency and equity markets: Evidence from developed and emerging markets

Abstract

The present study conducts a dynamic conditional cross-correlation and time–frequency correlation analyses between cryptocurrency and equity markets in both advanced and emerging economies. The purpose of the study is twofold. First, the study investigates the presence of the pure (narrow) form of financial contagion between cryptocurrency and stock markets in both advanced and emerging economies, during the black swan event of the COVID-19 crisis. Second, the study examines the hedging and safe-haven properties of cryptocurrencies against equity markets, before and during periods of financial upheaval triggered by the COVID-19 pandemic. Two econometric models are used: (1) the dynamic conditional correlation (DCC) GARCH and (2) the wavelet analysis models. Using the DCC GARCH model, the study found the evidence of high conditional correlations between cryptocurrency and equity markets. The high conditional correlation was mostly detected in periods of financial turmoil corresponding to the first quarter and the second quarter of 2020. The increase in conditional correlation during periods of financial upheaval (compared to a tranquil period) indicates the presence of the pure form of financial contagion. The wavelet cross-correlation analysis showed the evidence of positive cross-correlation between the Bitcoin and the equity markets during period of financial turmoil. The cross-correlation was identified in both short and long (coarse) scales. In short scales, the equity markets lead the cryptocurrency market, while the cryptocurrency market leads equity markets in coarse scales. The findings of the present study revealed that the degree of interdependence between cryptocurrency and equity markets has substantially increased during the COVID-19 period, and this has negated the safe-haven and hedging benefits of cryptocurrencies over equity markets.

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