The Effect of Bitcoin on Sector ETFs Before and During the Covid-19 Pandemic

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In this paper the effect of Bitcoin volatility on different sector ETFs is studied before and during the Covid-19 pandemic. The tremendously increased market capitalization of Bitcoin in combination with the economic globalization and Covid-19 pandemic caused increasing spillovers between cryptocurrencies and the stock markets. Evidence was found that before the Covid-19 pandemic some sector ETFs were close to zero and significantly affected by Bitcoin volatility and during the Covid-19 pandemic the effect of Bitcoin volatility on the sector ETFs increased positively and significant. It was also expected and found that during the Covid-19 pandemic cyclical sectors were more influenced by the Bitcoin volatility than defensive sectors through specific sector characteristics. However, there was some indicative evidence that not all defensive sectors were affected the least and not all cyclical sectors the most by the Bitcoin volatility. This illustrates that the classification of sectors has to be considered, since sector characteristics might have been changed during the Covid-19 pandemic. The increased spillovers of Bitcoin volatility on different sectors also caused unexpected volatility risk, which has consequences for the financial and policy decision making.
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