Spillover effects among cryptocurrencies in a pandemic: a time frequency approach

Abstract

Purpose This study investigates the time-varying volatility spillover connectedness among seven major cryptocurrencies before and during the COVID-19 pandemic. It aims to understand contagion risk and its implications for diversification and financial stability, especially during periods of extreme price volatility. Design/methodology/approach Using the frequency-domain spillover index, the study analyzes the interconnectedness of cryptocurrency markets with daily data from 10 August 2015 to 10 December 2021. This method allows for examining volatility spillovers across different time frequencies. Findings The study finds that cryptocurrencies are highly interconnected at higher frequencies, indicating significant contagion risk and limited short-term diversification opportunities. The spillover effects are frequency-dependent, varying across different time horizons. Practical implications The findings suggest the need for targeted regulatory policies focused on short-term cryptocurrency behavior to maintain financial stability. Investors should exercise caution when using cryptocurrencies for portfolio diversification, given the high interconnectedness and contagion risk. Originality/value This study uniquely contributes to the literature by applying a frequency-domain approach to analyze volatility spillovers across multiple cryptocurrencies, particularly in the context of the COVID-19 pandemic. It provides novel insights into the frequency-dependent nature of spillover effects, offering a deeper understanding of the contagion risk in cryptocurrency markets.