Journal article · 2024

Uncertainty and cryptocurrency returns: A lesson from turbulent times

Będowska-Sójka, B., Górka, J., Hemmings, D., Zaremba, A.

International Review of Financial Analysis, 94, 103330

DOI: 10.1016/j.irfa.2024.103330

Abstract

This paper examines the impacts of uncertainty indices on cryptocurrencies, and vice versa. We focus on instantaneous dependency in returns and volatility spillover effects among various indices proxying risk, namely geopolitical events, economic policy, commodity, stock and bond markets, and ten widely traded cryptocurrencies. Examining data from April 2018 to December 2022, we find that pairings of cryptocurrencies with the Volatility Index and the Crude Oil Volatility Index have dynamic correlations for returns that are different from zero and negative, but correlations with other uncertainty indices examined are non-significant. In the case of volatility spillovers, we consistently observe transmission from uncertainty indices to cryptocurrency prices to be generally rather weak, yet accelerates during turbulent periods such as the Covid-19 outbreak or the beginning of the Ukraine war. Overall, we conclude that while cryptocurrency pricing is largely disconnected from economic risk, the ability of the asset class to serve as a 'safe haven' may be limited. This paper explores the interplay between economic uncertainty and cryptocurrency behavior. Using data spanning from April 2018 to December 2022, we examine the relationship between ten major cryptocurrencies and a repertoire of uncertainty measures covering geopolitical events, economic policy, and commodity, equity, and bond markets. Cryptocurrency returns exhibit dynamic and positive correlation with stock market and oil volatility, but no significant association with other uncertainty proxies. In terms of volatility spillovers, the transmission from uncertainty indices to cryptocurrency markets is weak, but intensifies during turbulent periods such as the Covid-19 outbreak or the Ukraine war. Overall, the pricing of cryptocurrencies remains largely disconnected from economic risks, which casts doubt on their alleged "safe haven" properties.

Keywords: cryptocurrency, geopolitical risk, economic risk, volatility, spillovers, networks

Research topics: Cryptocurrency markets · Safe havens, hedging and geopolitical risk

Funding

• NCN OPUS 21, Narodowe Centrum Nauki, grant UMO-2021/41/B/HS4/02443
• COST Action CA19130 FinAI, European Cooperation in Science and Technology, grant CA19130

Presented at

Cite

@article{irfa2024_uncertainty,
  title = {Uncertainty and cryptocurrency returns: A lesson from turbulent times},
  author = {Będowska-Sójka, B. and Górka, J. and Hemmings, D. and Zaremba, A.},
  year = {2024},
  journal = {International Review of Financial Analysis},
  note = {94, 103330},
  doi = {10.1016/j.irfa.2024.103330}
}