Cryptocurrency Returns and Volatility Spillover During an Era of Uncertainty: COVID-19 and VIX

Abstract

This study aims to investigate the volatility of the cryptocurrencies during uncertainty created by Covid 19. For this purpose, the relationship between cryptocurrencies both pre- and post-Covid 19 era was introduced into the mean equation. The mean equation applies the VAR (1) - BEKK GARCH-M (1,1) method. Out of 23,845 cryptocurrencies, the research focuses on the 8 with the biggest market volume. As a result, not all cryptocurrencies can be linked to the research findings. Additionally, the data after Covid 19 covers the years January 2020 through March 2022, whereas the data before Covid 19 covers the years January 2018 through December 2019. Descriptive statistics show that DOGE coin has the most volatility and BNB has the highest return. BTC has the lowest volatility among the analyzed cryptocurrencies, it can be shown. It is interesting to see that bitcoin returns have a positive correlation. The ETH and LITE have the strongest favorable association. Due to the lag in its return during the pre-Covid 19 timeframe, BTC has a detrimental impact on the returns of other coins. The returns of other coins, including its own, are increased by the DOGE coin's one-period lagged return. It is also noteworthy that only BNB, XKM, and XRP are statistically significantly impacted by VIX spikes. Except for ADA, DOGE, and XLM, the one-period lagged return of BTC has a favorable impact on the returns of other coins. It may be said that both the pre-Covid-19 era and the post-Covid-19 era are affected by this condition. The study highlights the fact that cryptocurrencies experience first instant (average) volatility. The long-term uncertainties of other cryptocurrencies are statistically significantly and favorably impacted by the long-term uncertainties in Bitcoin. This situation can express the dominance of BTC among other cryptocurrencies. Additionally, investor behavior in the pre-Covid 19 and post-Covid 19 periods varied. Additionally, it is advised that investors invest more in BNB during the post-Covid 19 period than they did during the pre-Covid 19 time. A review of the literature on Covid 19 and the effect of global uncertainties on cryptocurrencies reveals that: 1) there is a dearth of conclusive evidence on return and volatility spreads across major cryptocurrencies, which is crucial for any investment decision regarding portfolio diversification and hedging strategies; and 2) there are two main gaps regarding the dearth of evidence on return and volatility spillovers between leading cryptocurrencies during a catastrophic event. By concentrating explicitly on the effect of Covid 19 and global uncertainties on cryptocurrencies, our study aims to close this gap in the literature.