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Time-varying dynamic conditional correlation between stock and cryptocurrency markets using the copula-ADCC-EGARCH model

Author

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  • Tiwari, Aviral Kumar
  • Raheem, Ibrahim Dolapo
  • Kang, Sang Hoon

Abstract

This study examines the time-varying correlations between six cryptocurrency and S&P 500 index markets using a copula-ADCC-EGARCH model. The increasing influence and usage of cryptocurrencies has led the notion in which it is regarded as risky assets. In order to maximize returns on investment, there must be hedging options to protect investors against potential risks. From empirical analysis, we find the overall time-varying correlations are very low, indicating that cryptocurrency serves as a hedge asset against the risk of S&P 500 stock market. We also show that volatilities respond more to negative shock as compared to positive shock in both markets. Furthermore, we identify Litecoin to be the most effective hedge asset against risk of S&P 500 index. Thus, we conclude that the cryptocurrency might be one of important elements in portfolio diversification.

Suggested Citation

  • Tiwari, Aviral Kumar & Raheem, Ibrahim Dolapo & Kang, Sang Hoon, 2019. "Time-varying dynamic conditional correlation between stock and cryptocurrency markets using the copula-ADCC-EGARCH model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 535(C).
    • Handle: RePEc:eee:phsmap:v:535:y:2019:i:c:s0378437119313159
    DOI: 10.1016/j.physa.2019.122295
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    More about this item

    Keywords

    Cryptocurrencies; Stock markets; Asymmetric dynamic conditional correlation; Copula;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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