We examine the dynamics of liquidity connectedness in the cryptocurrency market. We use the connectedness models of Diebold and Yilmaz (Int J Forecast 28(1):57–66, 2012) and Baruník and Křehlík (J Financ Econom 16(2):271–296, 2018) on a sample of six major cryptocurrencies, namely, Bitcoin (BTC), Litecoin (LTC), Ethereum (ETH), Ripple (XRP), Monero (XMR), and Dash. Our static analysis reveals a moderate liquidity connectedness among our sample cryptocurrencies, whereas BTC and LTC play a significant role in connectedness magnitude. A distinct liquidity cluster is observed for BTC, LTC, and XRP, and ETH, XMR, and Dash also form another distinct liquidity cluster. The frequency domain analysis reveals that liquidity connectedness is more pronounced in the short-run time horizon than the medium- and long-run time horizons. In the short run, BTC, LTC, and XRP are the leading contributor to liquidity shocks, whereas, in the long run, ETH assumes this role. Compared with the medium term, a tight liquidity clustering is found in the short and long terms. The time-varying analysis indicates that liquidity connectedness in the cryptocurrency market increases over time, pointing to the possible effect of rising demand and higher acceptability for this unique asset. Furthermore, more pronounced liquidity connectedness patterns are observed over the short and long run, reinforcing that liquidity connectedness in the cryptocurrency market is a phenomenon dependent on the time–frequency connectedness.
Bibliographical noteFunding Information:
Muhammad Abubakr Naeem gratefully acknowledges the support of Science Foundation Ireland under Grant Number 16/SPP/3347. This research is partly funded by the University of Economics Ho Chi Minh City, Vietnam.
© 2022, The Author(s).