Volatility Spillover in the Cryptocurrency market: Categorization of the Cryptocurrency Market Based on their Primary Use and the Effects of COVID-19

Abstract

Utilizing the generalized spillover index developed by Diebold and Yilmaz (2009,\n2012), we investigate the volatility connectedness between an index consisting of\nnine selected cryptocurrencies, S&P 500, Gold, and Copper. Furthermore, we\nstudy the connectedness and volatility spillover within the nine cryptocurrencies\nin the perspective of the categorization of the cryptocurrency market developed by\nCorbet et al. (2020b). To our knowledge, this is the first study investigating the\nconnectedness between these categories. Lastly, we analyze the initial effect of the\nCOVID-19 pandemic by using an extended set of data to June 2020 on the\nconnectedness within the cryptocurrency market. We also test the connectedness\nbetween the cryptocurrency market, S&P 500, and Gold during the same period.\nWe find that the cryptocurrency market has a weak connectedness with other\nfinancial markets, indicating that most of the volatility comes from within the\ncryptocurrency market. When studying the volatility spillover within the\ncryptocurrency market, in the perspective of categorizations, our results show that\nmost of the volatility is within the respective categories. Adding to this, there are\nsome key differences in the relationship of the categories. Finally, the COVID-19\npandemic increased the volatility and the spillovers across all markets. However,\nthe effects do not affect the results for the cryptocurrencies substantially.