Asymmetric Nonlinear Correlation between Cryptocurrencies and the Stock Market Performance in South Africa

Abstract

The increasing integration of cryptocurrencies into financial markets has strengthened their correlation with traditional assets like equities, reducing their diversification benefits and amplifying the risk of market contagion. Initially exhibiting distinct price behaviour, cryptocurrencies have become more aligned with stock market dynamics, especially during systemic shocks such as the Covid 19 pandemic. Although they offer high returns, their volatility driven by conditional and asymmetric shocks mirrors patterns observed in equity markets. These evolving dynamics suggest the potential for asymmetric contagion between crypto and stock markets, complicating portfolio diversification and increasing exposure to cross market spill lovers. While existing literature acknowledges cryptocurrency market integration, few studies explicitly examine their relationship with stock markets, particularly in terms of asymmetric and nonlinear behavior. Moreover, no research to date has investigated these aspects within the South African context. This study aims to fill that gap by examining the asymmetric nonlinear relationship between selected cryptocurrencies and South African stock indices. Using daily time series data from January 2013 to May 2024, the study applies the Nonlinear Autoregressive Distributed Lag (NARDL) model and the Wald test to explore these dynamics. The results indicate a significant asymmetric nonlinear correlation between cryptocurrencies and stock market indices. This asymmetric relationship suggests that cryptocurrencies may offer potential hedging benefits during periods of heightened stock market volatility, thereby providing valuable insights for investors and portfolio managers navigating increasingly interconnected financial markets.