Time Varying Risk Aversion and Its Connectedness : Evidence From Cryptocurrencies

The changing patterns of risk aversion of traditional financial assets may follow a non-linear, counter-cyclical, process. However, research in this area has not considered the effects of the rapidly developing cryptocurrency markets. Given the distinct features and growing impact of cryptocurrencies, it is important to understand how these assets differ from traditional products. In this paper we investigate the time effects of periodicity on risk aversion for a selection of major cryptocurrencies, as compared to major traditional financial assets where we identify significant periodic time-varying patterns when analysing risk aversion characteristics. Further, bilateral, and bidirectional Granger causalities are identified within cryptocurrency markets, as well as between cryptocurrencies and traditional financial assets. Bitcoin is identified as a leading information transmitter of the spillover of risk aversion upon other cryptocurrencies, while the estimated risk aversion in traditional financial markets is found to play a dominant role in the spillover processes upon the cryptocurrency cluster. The latter finding presents further evidence of cryptocurrency market maturity. The COVID-19 pandemic is found to have significantly influenced the connectedness of risk aversion among cryptocurrency and traditional financial markets