The Dynamic Connectedness between Cryptocurrencies and Foreign Exchange Rates: Evidence by TVP-VAR Approach

Abstract

We investigate the interconnectedness between major cryptocurrencies and foreign exchange rates. This study employs time-series daily data for the cryptocurrencies and foreign exchange rates closing prices, the data is obtained from investing.com and yahoo finance to cover the period of 10 November 2017 to 18 January 2022. The study adopts the connectedness approach developed by Diebold Yilmaz (2014), using the TVP-VAR model to analyze twelve cryptocurrencies and eight foreign exchange rates. The results reveal a greater degree of connectedness across cryptocurrencies and foreign exchange rates over the whole sample, pre and during the corona pandemic, indicating that the Corona pandemic donates to the increase of volatility spillover across the currency and cryptocurrency markets. The results further show that Ethereum, Bitcoin Cash, Litecoin, Bitcoin, TRON, Cardano and Ripple are the main transmitters of shocks to other cryptocurrencies. Moreover, the EUR/USD, AUD/USD and NZD/USD are the main transmitters of shocks to other foreign exchange rates. The study has significant implications for investors, and portfolio managers. Our results offer evidence to improve financial risk assessment, and portfolio hedging strategies of cryptocurrencies against the uncertainty raised by Covid-19 Pandemic, which our findings may support investors in properly rebalancing their portfolios as the level of uncertainty in the market changes.