Tech titans and crypto giants: Mutual returns predictability and trading strategy implications

Abstract

• Reveals significant positive predictability in the stock market–cryptocurrency nexus. • U.S. tech and semiconductor stocks and Nvidia predict cryptocurrency returns and vice versa. • Mutual returns predictability is significant across several quantiles and lags. • It generally holds when controlling for the U.S. dollar index and treasury market. • A trading strategy based on the cross-quantilogram outperforms a benchmark strategy. This study examines the directional return predictability between the technology sector of U.S. stock market and three major cryptocurrencies (Bitcoin, Ethereum, and Dogecoin). Using daily data from August 7, 2015, to February 8, 2024, and the cross-quantilogram approach in both static and dynamic settings, the results reveal significant positive predictability in the stock market–cryptocurrency nexus. The technology sector, semiconductors subsector, and Nvidia Corporation exert predictive power over cryptocurrency returns and vice versa across several quantiles and lags. When controlling for the impact of other financial variables, namely, U.S. dollar and U.S. treasury markets, the return predictability holds, especially for the two largest cryptocurrencies, Bitcoin and Ethereum, which reflects their importance and tighter connections with the U.S. technology sector. A trading strategy based on the results of the cross-quantilograms outperforms a benchmark strategy (i.e., always long position in either stocks or cryptocurrency), which underlines the practical implications of our main findings, particularly in terms of the significant return interactions between U.S. technology/semiconductors stocks and large cryptocurrencies.