Cryptocurrencies, Stocks, and Economic Policy Uncertainty : A FAVAR Analysis

We study the interactions between cryptocurrencies, stock markets, and economic policy uncertainty (EPU) by means of a Factor-Augmented Vector Autoregressive (FAVAR) framework. We rely on two market factors to model the comovements of returns within cryptocurrencies and stock markets. We document a greater heterogeneity across cryptocurrencies than stocks, with a fragmentation of the market by functional characteristics of the projects. We then use a structural analysis to explore cross-market spillover effects and how EPU affects the two markets. We find that stock returns positively respond to crypto shocks, but not vice versa. We also find that the effect of EPU on crypto returns depends on the originating region of the policy uncertainty, with cryptocurrencies providing a safe haven against the Chinese and the U.K., but not the U.S., EPU