Cue the volatility spillover in the cryptocurrency markets during the COVID-19 pandemic: evidence from DCC-GARCH and wavelet analysis

Abstract

This study investigates the dynamic mechanism of fnancial markets on volatility spillovers across eight major cryptocurrency returns, namely Bitcoin, Ethereum, Stellar, Ripple, Tether, Cardano, Litecoin, and Eos from November 17, 2019, to January 25, 2021. The study captures the fnancial behavior of investors during the COVID-19 pandemic as a result of national lockdowns and slowdown of production. Three diferent methods, namely, EGARCH, DCC-GARCH, and wavelet, are used to understand whether cryptocurrency markets have been exposed to extreme volatility. While GARCH family models provide information about asset returns at given time scales, wavelets capture that information across diferent frequencies without losing inputs from the time horizon. The overall results show that three cryptocurrency markets (i.e., Bitcoin, Ethereum, and Litecoin) are highly volatile and mutually dependent over the sample period. This result means that any kind of shock in one market leads investors to act in the same direction in the other market and thus indirectly causes volatility spillovers in those markets. The results also imply that the volatility spillover across cryptocurrency markets was more infuential in the second lockdown that started at the beginning of November 2020. Finally, to calculate the fnancial risk, two methods—namely, value-at-risk (VaR) and conditional value-at-risk (CVaR)—are used, along with two additional stock indices (the Shanghai Composite Index and S&P 500). Regardless of the confdence level investigated, the selected crypto assets, with the exception of the USDT were found to have substantially greater downside risk than SSE and S&P 500.