Cryptocurrencies, cryptocommodities or cryptostocks?

Abstract

In this paper the authors analyse connectedness between major asset classes and cryptocurrencies. From all asset classes, 6 important financial instruments are chosen to represent it. Stock markets are represented by stock indices: S&P500, Dow Jones Industrial Average, FTSE100, DAX, Nikkei 225 and the Shanghai Composite Index. Currencies are foreign exchange crosses against U.S dollar: euro, Japanese yen, British pound, Australian-, New Zealand-, and Canadian dollar. Commodities are sugar, gold, corn, wheat, natural gas and crude oil. Connectedness is analysed using the Diebold-Yilmaz spillover framework which uses forecast error variance decompositions associated with VAR-models. The results show that cryptocurrencies constitute a separate asset class which is connected to stocks and commodities as well, and more connected to them then to currencies. This result has implications for risk management. As derivates markets for cryptocurrencies develop, they could become a considerable tool for diversification.