Modeling Time-Varying Co-Movements Between Major Cryptocurrencies and Foreign Exchange Markets

Abstract

This chapter scrutinizes the dynamic linkages between major cryptocurrencies and fiat currencies of developed and emerging countries. To do this, the authors estimate the Scalar-BEKK GARCH models from September 2017 to January 2022. To shed light on the effects of specific events, the authors also estimate the models for the sub-periods: the great crypto crash, the Covid-19 pandemic, and the vaccination. Empirical results suggest that the time-varying relationships between the crypto- and fiat currencies highly depend on the country- and crypto-specific dynamics. By the decentralized nature of cryptocurrencies, it is not an easy venture to define the stylized facts on those dynamic relationships. The most striking result shows a sharp and massive decline in the conditional covariances between the cryptos and the fiat currencies of developed countries except the Japanese Yen at the onset of the Covid-19 pandemic.