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Contrasting Cryptocurrencies with Other Assets

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Journal of Risk and Financial Management Article Contrasting Cryptocurrencies with Other Assets: Full Distributions and the COVID Impact Esfandiar Maasoumi * and Xi Wu 􏰆􏰇􏰈􏰆􏰉 􏰋􏰌􏰍 􏰎􏰏􏰐􏰑􏰒􏰈􏰓 Citation: Maasoumi,Esfandiar,and Xi Wu. 2021. Contrasting Cryptocurrencies with Other Assets: Full Distributions and the COVID Impact. Journal of Risk and Financial Management14: 440. https:// doi.org/10.3390/jrfm14090440 Academic Editor: Shigeyuki Hamori Received: 11 August 2021 Accepted: 6 September 2021 Published: 14 September 2021 Publisher’s Note: MDPI stays neutral with regard to jurisdictional claims in published maps and institutional affil- iations. Copyright: © 2021 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https:// creativecommons.org/licenses/by/ 4.0/). Department of Economics, Emory University, Atlanta, GA 30322, USA; xi.wu@emory.edu * Correspondence: emaasou@emory.edu Abstract: We investigate any similarity and dependence based on the full distributions of cryptocur- rency assets, stock indices and industry groups. We characterize full distributions with entropies to account for higher moments and non-Gaussianity of returns. Divergence and distance between distributions are measured by metric entropies, and are rigorously tested for statistical significance. We assess the stationarity and normality of assets, as well as the basic statistics of cryptocurrencies and traditional asset indices, before and after the COVID-19 pandemic outbreak. These assessments are not subjected to possible misspecifications of conditional time series models which are also examined for their own interests. We find that the NASDAQ daily return has the most similar density and co-dependence with Bitcoin daily return, generally, but after the COVID-19 outbreak in early 2020, even S&P500 daily return distribution is statistically closely dependent on, and indifferent from Bitcoin daily return. All asset distances have declined by 75% or more after the COVID-19 outbreak. We also find that the highest similarity before the COVID-19 outbreak is between Bitcoin and Coal, Steel and Mining industries, and after the COVID-19 outbreak is between Bitcoin and Business Supplies, Utilities, Tobacco Products and Restaurants, Hotels, Motels industries, compared to several others. This study shed light on examining distribution similarity and co-dependence between cryptocurrencies and other asset classes. Keywords: cryptocurrency; bitcoin; entropy; co-dependence; COVID-19 1. Introduction Since the emergence of Bitcoin based on blockchain technology in 2018, global financial markets have witnessed the birth and rapid rise of cryptocurrencies (cryptos) as a new asset class. Cryptos are based on fundamentally new technologies, the potential of which highly anticipated but not fully understood. In their current form, however, cryptos are also behaving like high growth assets. The cryptocurrency market is an important part of the global assets markets. As of September 2020, there were over 18.53 million Bitcoins in circulation with a total market value of around USD 199.62 billion. With the rapid development of the cryptocurrency market, the literature has focused on statistical properties and risk behavior of cryptocurrency in comparison with classical assets, like equities and exchange rates. In the setting of time series models, Pichl and Kaizoji (2017) found that cryptocurrency markets are even more volatile than foreign ex- change markets. Bouri et al. (2017), (Katsiampa 2017), (Bariviera 2017) and ( Stavroyiannis 2018) observed the phenomenon of volatility clustering in cryptocurrency market. Regime- switching behaviors are detected by (Bariviera et al. 2017), (Balcombe and Fraser 2017), (Thies and Molnar 2018) have identified structural breaks in the volatility process of Bit- coin via a Bayesian framework. Lahmiri et al. (2019) and (Lahmiri and Bekiros 2018) have pointed out that Bitcoin markets are characterized by long memory and multifractality. Recent studies also examined the performance of cryptos under the COVID-19 pandemic. Vukovic et al. (2021) developed a unique COVID-19 global composite index that measures COVID-19 pandemic time-variant movements on each day. Sarkodie et al. (2021) investi- gated the implication of COVID-19 outcomes on market prices of several leading cryptos. J. Risk Financial Manag. 2021, 14, 440. https://doi.org/10.3390/jrfm14090440 https://www.mdpi.com/journal/jrfm

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