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Liquidity spillovers between cryptocurrency and foreign exchange markets

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  • Nekhili, Ramzi
  • Sultan, Jahangir
  • Bouri, Elie

Abstract

Market liquidity spillover has been studied using fiat and digital currency (cryptocurrency), though separately. In today’s globally connected financial markets, there is interconnectedness among financial assets, as economic agents make decisions involving multiple asset classes. In this paper, we construct daily liquidity measures for five major cryptocurrencies and seven major fiat currencies and examine their interdependence in the time–frequency domain. We find that liquidity connectedness is event-driven and varies with time. Notably, there is an increase in liquidity spillover at the peak of the COVID-19 pandemic, reflecting heightened uncertainty and market instability. We also find that, at the peak of the pandemic, the total spillover index is stronger in the long run than the short run, highlighting a possible flight-to-liquidity during periods of stress. The Euro stands out as the principal net transmitter of liquidity shocks in the short run, while Ethereum plays this role in the long run. Further analysis highlights the role of some economic and financial variables in driving the dynamics of liquidity spillovers and reveals some heterogeneity in the identity of drivers between the short and long run. The results enrich the academic literature by providing evidence of liquidity spillovers between cryptocurrencies and foreign exchange markets during times of stress, which is insightful for traders, investors, and policymakers.

Suggested Citation

  • Nekhili, Ramzi & Sultan, Jahangir & Bouri, Elie, 2023. "Liquidity spillovers between cryptocurrency and foreign exchange markets," The North American Journal of Economics and Finance, Elsevier, vol. 68(C).
    • Handle: RePEc:eee:ecofin:v:68:y:2023:i:c:s106294082300092x
    DOI: 10.1016/j.najef.2023.101969
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    References listed on IDEAS

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    1. Diebold, Francis X. & Yılmaz, Kamil, 2014. "On the network topology of variance decompositions: Measuring the connectedness of financial firms," Journal of Econometrics, Elsevier, vol. 182(1), pages 119-134.
    2. Kristjanpoller, Werner & Bouri, Elie, 2019. "Asymmetric multifractal cross-correlations between the main world currencies and the main cryptocurrencies," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 523(C), pages 1057-1071.
    3. Oh, Gabjin & Kim, Seunghwan & Eom, Cheoljun, 2007. "Market efficiency in foreign exchange markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 382(1), pages 209-212.
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    Citations

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    Cited by:

    1. Narayan, Shivani & Kumar, Dilip, 2024. "Unveiling interconnectedness and risk spillover among cryptocurrencies and other asset classes," Global Finance Journal, Elsevier, vol. 62(C).
    2. Wan, Jieru & Yin, Libo & Wu, You, 2024. "Return and volatility connectedness across global ESG stock indexes: Evidence from the time-frequency domain analysis," International Review of Economics & Finance, Elsevier, vol. 89(PB), pages 397-428.
    3. Zhou, Donghai & Liu, Xiaoxing & Tang, Chun, 2024. "Does the international oil market interact with China’s financial market? New evidence from time-varying higher moments," The North American Journal of Economics and Finance, Elsevier, vol. 74(C).
    4. Joo, Young C. & Park, Sung Y., 2024. "Hedging Bitcoin with commodity futures: An analysis with copper, gas, gold, and crude oil futures," The North American Journal of Economics and Finance, Elsevier, vol. 72(C).
    5. Yousaf, Imran & Assaf, Ata & Demir, Ender, 2024. "Relationship between real estate tokens and other asset classes: Evidence from quantile connectedness approach," Research in International Business and Finance, Elsevier, vol. 69(C).
    6. Abakah, Emmanuel Joel Aikins & Wali Ullah, G M & Abdullah, Mohammad & Lee, Chi-Chuan & Sulong, Zunaidah, 2024. "Correlation structure between fiat currencies and blockchain assets," Finance Research Letters, Elsevier, vol. 62(PA).

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    More about this item

    Keywords

    Liquidity measure; Time and frequency spillovers; Bitcoin; Cryptocurrency; Fiat currencies; COVID-19 outbreak;
    All these keywords.

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General

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