Cryptocurrency as an Indicator for Economic and Market Sentiment
Open Access
- Author:
- Tillinger, Harel
- Area of Honors:
- Economics
- Degree:
- Bachelor of Science
- Document Type:
- Thesis
- Thesis Supervisors:
- Conor Ryan, Thesis Supervisor
Sung Jae Jun, Thesis Honors Advisor - Keywords:
- Cryptocurrency
Bitcoin
Ethereum
Market Efficiency
US Equity Market
After-Hour Trading Effects
Information Channel - Abstract:
- This thesis analyzes the effect of changes in Bitcoin and Ethereum returns on the returns of S&P 500 and how well those cryptocurrency changes act as an information indicator for the US equity market. Cryptocurrencies have sprung on the scene as major players in the financial sector as they have a market cap of 1.19 trillion dollars with Bitcoin and Ethereum holding the lion share of the market cap with over 64%. They are a unique asset class as they can be traded 24 hours a day in contrast to the US equity markets that are traded from 9:30 am to 4 PM. Thus, this paper also includes foreign exchange markets to understand the effects of some after-hours alternatives on the S&P 500. This paper considers the existing literature on the information channel between cryptocurrencies and equity markets, the efficiency of cryptocurrencies and traditional equities, and the feedback from cryptocurrencies to equity markets. With the relevant data, I will estimate linear regression models to analyze the significance of Bitcoin and Ethereum returns alongside German and Japanese market data. They will be run during normal market hours and after-hours in order to understand the effect of these assets at different times. The results will show that there is some statistical significance between both Bitcoin and Ethereum and the S&P 500. For example, during market hours, a 1% increase in Ethereum returns is associated with a 0.026% increase in S&P 500. In addition, the results illustrate that foreign markets act as an indicator of variance found in the S&P 500. Cryptocurrencies explain 6.3% of the variance in S&P 500 prices, while foreign markets explain 18.6% of the variance in S&P 500 prices.