Connectedness of cryptocurrencies and prevailing uncertainties

Faruk Balli, Anne de Bruin, Md Iftekhar Hasan Chowdhury, Muhammad Abubakr Naeem

Research output: Contribution to journalArticlepeer-review

37 Citations (Scopus)

Abstract

We investigate dynamic connectedness of cryptocurrencies using Generalized Forecast Error Variance Decomposition into short, medium, and long-term phases. Though all phases resemble similar drifts, the magnitude of short-term connectedness is much higher than medium and long-term. Notably, the U-shaped trajectory explains the increasing connectedness of cryptocurrencies with their heightened popularity in recent times. We further utilize Continuous Wavelet Transform to rationalize such connectedness with common economic and financial market uncertainty. Importantly, we show that as economic uncertainty increases, the connectedness among cryptocurrencies decreases. This highlights the potential for cryptocurrencies to be an alternative instrument for hedging against underlying uncertainty.

Original languageEnglish
Pages (from-to)1316-1322
Number of pages7
JournalApplied Economics Letters
Volume27
Issue number16
DOIs
Publication statusPublished - Sept 19 2020
Externally publishedYes

Keywords

  • Cryptocurrency
  • economic uncertainty
  • frequency connectedness
  • wavelet coherence

ASJC Scopus subject areas

  • Economics and Econometrics

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