Dynamic Connectedness of Major Digital Currencies: A Time-Varying Approach

Abstract

The continuous increase in the market capitalization of digital currencies has determined them to be an essential force driving global financial development. Research on digital currency connectedness has implications for the pricing of related financial products and the development of risk hedging strategies. This study aims to analyse the changing relationship among four prominent digital currencies over time. Our research period covers normal periods, outbreaks, and the post-epidemic phase. A refined TVP-VAR method was adopted to conduct this study, which ensures time-varying analysis and avoids errors caused by the rolling-window size and the calculation of the observation loss. It is found that the total connectedness of major digital currencies is in an upward trend in the majority of the time, which, however, dropped dramatically in 2020 as the epidemic spreads internationally. It is also found that ETH is a consistent spillover transmitter and that although BTC is often shown as a transmitter, its spillover initially declines considerably and then remains weak until recently. BNB and XRP are typically spillover recipients, with BNB’s spillover varying more greatly.