The Spill-Over Effects of Cryptocurrencies on Equity and Bonds Market

Abstract

This study examines the extent to which crypto assets have moved to the mainstream by estimating the potential for spillovers crypto on bond and equity markets using daily data on price volatility and returns. The analysis reveals that the coefficients of the constant variance term, the ARCH and the GARCH parameters are positive and statistically significant at the 1% level across all models. In respect of the mean equation, the results suggest that the spill-over effects of bitcoin on equities and long-term bonds are ambiguous. Spillovers from price volatility of the oldest and most popular crypto asset, Bitcoin, to the S&P 500 and MSCI emerging markets indices have increased by about 12-16 percentage points since the onset of the COVID-19 pandemic, while those from its returns have increased by about 8-10 percentage points. This clearly indicates that the persistence of volatility shocks, as represented by the sum of the ARCH and GARCH parameter is large. Moreover, this suggests that the effect of today’s shock remains in the forecasts of variance for many periods in the future