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. 2022 Sep:162:112443.
doi: 10.1016/j.chaos.2022.112443. Epub 2022 Jul 14.

The effect of COVID-19 pandemic on return-volume and return-volatility relationships in cryptocurrency markets

Parisa Foroutan  1 , Salim Lahmiri  1
Affiliations

The effect of COVID-19 pandemic on return-volume and return-volatility relationships in cryptocurrency markets

Parisa Foroutan et al. Chaos Solitons Fractals. 2022 Sep.

Abstract

Understanding the dynamics of cryptocurrency markets during financial crises such as the recent one caused by the COVID-19 pandemic is crucial for policy makers and investors. In this study, the effect of COVID-19 pandemic on the return-volatility and return-volume relationships for the ten most traded cryptocurrencies, namely Tether, Bitcoin, Ethereum, Ripple, Litecoin, Bitcoin Cash, EOS, Chainlink, Cardano, and Monero is examined. Further, the behavior of cryptocurrencies during COVID-19 pandemic is compared with less volatile markets such as Gold, WTI, and BRENT crude oil markets. To study the effect of volatility on cryptocurrency return, an EGARCH-M model is employed while for the return-volume relationships the VAR model and Granger causality tests are utilized. Results show that the return-volatility relationships for Tether, Ethereum, Ripple, Bitcoin Cash, EOS, and Monero are significant during COVID-19 pandemic, while the same relationship is not significant prior to the pandemic for any of the studied cryptocurrencies. Our findings of the return-volume relationship support the availability of causal relations from return to trading volume changes for Chainlink and Monero in the pre-COVID-19 period and for Ethereum, Ripple, Litecoin, EOS, and Cardano during the COVID-19 period. However, considering the absolute values of returns, we found a significant relationship from cryptocurrencies' absolute returns to trading volume changes for both the prior and during COVID-19 periods. From a managerial perspective, gold can be considered a suitable asset for portfolio hedging during the pandemic period and trading volume can help traders and investors identify the effect of momentum and potential trend in cryptocurrencies on their investments.

Keywords: COVID-19 pandemic; Cryptocurrency; EGARCH-M; Granger causality; Return-volatility relationship; Return-volume relationship.

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Conflict of interest statement

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

Figures

Fig. 1-
Fig. 1-
Market volatilities in pre-COVID-19 and during COVID-19 pandemic periods.
Fig. 1-
Fig. 1-
Market volatilities in pre-COVID-19 and during COVID-19 pandemic periods.
Fig. 2-
Fig. 2-
Distribution of probabilities for the significance of EGARCH in mean parameter under three different residual distribution assumptions.
Fig. 3-
Fig. 3-
Distribution of probabilities for the Granger causality tests.
See this image and copyright information in PMC

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