Uncertainty and Risk in Cryptocurrency Markets: Evidence of Time-frequency Connectedness

Abstract

This study aims to investigate the spillover effects from geopolitical risks (proxied by the geopolitical risk index) and cryptocurrencies-related uncertainty (proxied by the Cryptocurrency Uncertainty Index) to cryptocurrencies. We utilise the Baruník and Křehlík (2018) framework to detect timefrequency connectedness. Our investigation for the period 2017 to 2022 discovers significant spillover effects from both indices to cryptocurrencies. Utilising the information transmission theory and network graphs, our findings reveal that some cryptocurrencies function as net receivers of spillovers from geopolitical risks and uncertainty in the short-term, while over longer time horizons they transform into net transmitters of spillovers to uncertainty. The study contributes to better understanding how uncertainty due to various factors (geopolitical, policy changes, regulatory changes, etc.) could affect the cryptocurrencies' markets.