Bitcoin and stock market indices: analysis of volatility’s clusters during the bitcoin bubble based on the dynamic conditional correlation model

Abstract

The market of virtual currencies, called cryptocurrency, has grown immensely since 2008 in terms of market capitalisation and the numbers of new currencies. Bitcoin is one of the most famous cryptocurrency with an estimated market capitalisation of nearly $ 69 billion. The fact that Bitcoin prices have fallen about 70% from their peak value and most indices were down double-digit year to date (2018) with a high daily volatility create the appearance that there has to be a correlation. The purpose of this paper is to investigate the contagion effect between Bitcoin prices and the leading American, European and Asian equity markets using the dynamic conditional correlation (DCC) model proposed by Engle and Sheppard (2001). Contagion is defined in this context as the statistical break in the computed DCCs as measured by the shifts in their means and medians. Even it is astonishing that the contagion is lower during price bubbles, the main finding indicates the presence of contagion in the different indices among the three continents and proves the presence of structural changes during the Bitcoin bubble. Moreover, the analysis shows that specific market indices are more correlated with the Bitcoin price than others.