Abstract
This study investigates the correlation between cryptocurrency markets and traditional U.S. stock markets by analyzing price data from January 5, 2016, to February 5, 2021. Using the NYSE Bitcoin Index (NYXBT) and S&P 500 Index as proxies, we employ a t-Copula-GARCH-Skewed-T model to measure dynamic interdependence. Key findings include:
- Cryptocurrency and stock markets exhibited significantly strengthened correlation during the study period
- Major events like policy shifts, trade wars, and COVID-19 impacted market linkages through investor sentiment channels
- The pandemic created the most substantial volatility co-movement between markets
👉 Discover how cryptocurrency markets interact with traditional finance
Introduction
The 2008 introduction of Bitcoin marked the dawn of decentralized digital assets. As cryptocurrency markets matured, questions emerged about their relationship with traditional financial systems. This paper examines:
- Dynamic correlations between crypto and equities
- Event-driven changes in market linkages
- Practical implications for investors and regulators
Methodology
Our analytical framework combines advanced econometric techniques:
Core Model Components
| Component | Purpose |
|---|---|
| GARCH(1,1) | Volatility clustering modeling |
| Skewed-T distribution | Fat-tailed return distribution fitting |
| t-Copula | Nonlinear dependence measurement |
Data Characteristics
- Sample Period: 1/5/2016 - 2/5/2021 (1,261 observations)
- Data Sources: NYXBT (crypto proxy), S&P500 (equity proxy)
- Transformation: Logarithmic returns for stationarity
Key Findings
Evolving Market Correlation
- 2016-2018: Weak positive correlation (ρ ≈ 0.05)
- 2018-2019: Moderate correlation (ρ ≈ 0.12)
- 2019-2021: Strong correlation (ρ ≈ 0.24)
Event Impact Analysis
| Event | Correlation Change | Mechanism |
|---|---|---|
| Regulatory easing (2017) | +38% | Investor optimism |
| Trade wars (2018) | +52% | Risk aversion |
| COVID-19 (2020) | +90% | Market panic |
👉 Learn about cryptocurrency market dynamics
Practical Implications
For Regulators
- Enhance cross-market monitoring systems
- Develop coordinated policy frameworks
- Implement real-time risk alerts
For Investors
- Rebalance portfolios during event windows
- Monitor sentiment indicators
- Hedge across asset classes
FAQ Section
Q: Why study cryptocurrency-stock market linkages?
A: Understanding these relationships helps manage portfolio risk and anticipate systemic financial impacts.
Q: What makes COVID-19's impact unique?
A: The pandemic simultaneously affected:
- Liquidity conditions
- Investor psychology
- Global economic fundamentals
Q: How reliable are these findings long-term?
A: While our 5-year sample provides robust evidence, cryptocurrency markets continue evolving rapidly.
Q: Can cryptocurrencies replace traditional hedges?
A: Our results suggest crypto assets show hedging potential but come with higher volatility than gold or bonds.
Q: What's the next research direction?
A: Future studies should examine:
- Altcoin correlations
- Derivatives market impacts
- Central bank digital currency effects
Conclusion
This research demonstrates strengthening interdependence between cryptocurrency and equity markets, particularly during systemic shocks. The t-Copula-GARCH-Skewed-T model effectively captures these evolving relationships, providing valuable insights for financial decision-makers.