The Nexus between Cryptocurrencies and the Fear Index: Evidence from Bitcoin and Ethereum

Abstract

This study examines the nexus between selected cryptocurrencies represented by Bitcoin and Ethereum and the expected market volatility denoted by the VIX index. We use daily data for the period of 06/01/2021 – 07/07/2023. Using Hong (2001) and Hong et al. (2009) Granger causality tests we find no causality in mean, however, we find strong bidirectional causality in variance for the variables at the 5% significance level across all lag lengths. At the time-varying causality analysis, we find BTC causes VIX in the 1st lag. The analysis findings have important implications for portfolio managers and potential investors. Although no direct causal relationship was found between Bitcoin and VIX, or Ethereum and VIX in terms of returns, the strong bidirectional causality in variance suggests that changes in volatility can affect related assets. This information can be utilized by portfolio managers to effectively assess mandates and manage portfolio risk.