Volatility Spillover in the Cryptocurrency market: Categorization of the Cryptocurrency Market Based on their Primary Use and the Effects of COVID-19

Abstract

Utilizing the generalized spillover index developed by Diebold and Yilmaz (2009, 2012), we investigate the volatility connectedness between an index consisting of nine selected cryptocurrencies, S&P 500, Gold, and Copper. Furthermore, we study the connectedness and volatility spillover within the nine cryptocurrencies in the perspective of the categorization of the cryptocurrency market developed by Corbet et al. (2020b). To our knowledge, this is the first study investigating the connectedness between these categories. Lastly, we analyze the initial effect of the COVID-19 pandemic by using an extended set of data to June 2020 on the connectedness within the cryptocurrency market. We also test the connectedness between the cryptocurrency market, S&P 500, and Gold during the same period. We find that the cryptocurrency market has a weak connectedness with other financial markets, indicating that most of the volatility comes from within the cryptocurrency market. When studying the volatility spillover within the cryptocurrency market, in the perspective of categorizations, our results show that most of the volatility is within the respective categories. Adding to this, there are some key differences in the relationship of the categories. Finally, the COVID-19 pandemic increased the volatility and the spillovers across all markets. However, the effects do not affect the results for the cryptocurrencies substantially.