Time: Wednesday, 27/Aug/2025: 12:00pm - 12:30pm |
Location: Carmen Conference hall Meeting hall “Carmen”, which can accommodate up to 70 people |
Transmission Dynamics in Crypto Markets: Comparing Volatility and Liquidity Spillover Networks
1Poznan University of Economics and Business, Poland; 2Wrocław University of Economics, Poland
Cryptocurrencies have made their mark on financial markets, becoming a fast-growing segment with more than 20,000 assets since Bitcoin's introduction in 2009. As the most popular cryptocurrencies are often considered diversifiers in traditional portfolios, understanding their dependence structure and risk spillover mechanisms becomes crucial.
This article explores connectedness in the cryptocurrency market through the lens of two critical dimensions: volatility and liquidity. We examine spillovers across 55 of the most capitalized cryptocurrencies continuously traded between January 2018 and December 2024, a period encompassing several major market disruptions. Using network science tools and the frequency connectedness approach based on variance decomposition, we investigate how much of the future volatility or liquidity of a crypto asset relies on shocks observed in other cryptocurrencies.
For both volatility and liquidity connectedness, we build networks and identify the most central cryptocurrencies—those that function as primary contagion sources within the system. We apply several centrality measures and utilize rankings based on the TOPSIS method to determine the most influential players. Our analysis employs both static approaches for the full sample and dynamic approaches within moving windows, with LASSO methods applied in estimating the complex multivariate system.
Our findings reveal that liquidity networks and volatility networks exhibit distinct patterns. The dynamic approach shows that over time, spillovers in liquidity are stronger than in volatility, with both increasing during turbulent periods. When considering market capitalization, the strongest transmission of volatility and liquidity flows from highly capitalized cryptos to smaller ones, but the transmission power of the biggest cryptos is decreasing over time.
We contribute to the literature by jointly examining volatility and liquidity risk dimensions, identifying central nodes in both networks, and providing a temporal analysis spanning multiple market regimes. Our findings carry important implications for international investors and portfolio managers who consider incorporating cryptocurrencies into their portfolios, enabling better-fitted investment strategies and enhanced understanding of the cryptocurrency market's resilience and contagion mechanisms.