Connexion Between Cryptocurrencies Liquid and Futures Markets: Discernment from Static, Dynamic and Wavelet Approach

Abstract

The knowledge of the interconnectedness between liquid and futures markets of cryptocurrencies amidst dynamic contemporary environment can be enriched through the full characterization of the direction, persistence and intensity of information flows between these markets. So, the present study attempts to investigate the static and dynamic connexions between liquid and futures markets of Bitcoin, Ethereum, Litecoin, Ripple XRP and Bitcoin Cash from June 2018 to June 2022. The connexion between their liquid and futures markets is first investigated using unconditional correlation, Johansen’s cointegration, vector error correction and Wald’s block exogeneity. Their estimates discern connexions encompassing significant long-run relationships between their liquid and futures markets; momentous unidirectional long-run causality from their futures market to liquid market; and momentous bidirectional short-run causality from their liquid market to futures market and from their futures market to liquid market. The present treatise encompasses methodological advancement in the investigation of interconnectedness between these markets by employing a dynamic conditional correlation model and a wavelet transform framework. Their discerned estimates indicate that the markets of Bitcoin, Litecoin, Ethereum and Bitcoin Cash have only momentous long-run perseverance, lingering and spillover effects of shocks’ sway on conditional correlations. However, there is momentous short- and long-run perseverance, lingering and spillover effects in the case of Ripple XRP. The wavelet coherence analysis also confirms these results by indicating a bidirectional short-run causal relation and a long-run positive comovement between liquid returns and futures returns of these cryptocurrencies. These discernments may help investors, portfolio managers and policymakers to enhance hedging effectiveness through optimal portfolio allocation and monitor financial contagion to attain and sustain financial stability in economies.