Investigation of cointegration and causal linkages on Bitcoin volatility during COVID-19 pandemic

Abstract

In this study, we focus on a prominent feature in Bitcoin: its volatility. This paper aims to examine the volatility action of Bitcoin's price during the COVID-19 pandemic through various angles: COVID-19 fear sentiments, investor fear sentiments, macro-financial factors, and crypto market factors. The study utilises daily data from 11 March 2020 to 31 May 2021. We implemented an ARDL bound testing approach to find cointegration, and the Toda-Yamamoto approach to further examine any existing causal relationships between the variables. The empirical results show that COVID-19 fear increased Bitcoin volatility and a unidirectional causal relation was found between them. Investor fear sentiments revealed that US dollar volatility moved in the same direction as Bitcoin volatility, while VIX was found to be insignificant. Gold, crude oil, and the stock market did not influence the volatility of Bitcoin. Overall, only crypto market factors were cointegrated with Bitcoin volatility in the long run.