The impact of financial stress and equity market uncertainty on cryptocurrencies under structural breaks

Abstract

This study examines the impact of the Financial Stress Index (FSI) and US Equity Market Uncertainty (EMU) on cryptocurrencies. We analyse the short and long-run impact of FSI on prices of the top five cryptos using the Nonlinear ARDL (NARDL) framework to assess the alternative asset suitability of these cryptocurrencies during different financial market stress events. Our analysis finds a statistically significant impact of FSI and EMU on the cryptocurrency returns for both short-run and long-run. While the impact of FSI is asymmetric in the long run, we find that in the short run, the impact is symmetric. Thus, a rise in the FSI has a larger impact on the returns when compared to a fall in the FSI in the long run. The findings across various subperiods suggest that FSI and EMU affect the returns of cryptos differently. While in some periods, we see that a surge in financial stress leads to an increase in returns for some of the cryptos, for others, it leads to a decrease in returns. This indicates that the investors do not have the same preference for all the cryptos during periods of heightened financial stress and they may not be considered equal safe havens. Our results have clear policy implications for investors, regulators, and policymakers.