Do Crypto and Equity Go Hand in Hand? An Empirical Study of G-7 Economies Using VECM,Granger Causality and Panel Data Analysis

Abstract

Cryptocurrencies have emerged as attractive investment options, offering the potential for portfolio diversification and serving as hedging instruments. The primary aim of the study is to explore investment opportunities and strategies of causal linkages between crypto and equity markets, focusing on the world’s largest developed markets within a group of seven countries (G-7), namely Canada, France, Germany, Italy, Japan, the United Kingdom and the United States of America. The causality analysis of G-7 equity markets with the crypto index (CCI30) spread over thirty digital currencies is done using the vector error correction model (VECM), Granger Causality tests, and panel data approaches. The results of VECM have shown a long-term equilibrium between the equity index and crypto index only in France. However, causal linkages have also been found in four other countries, that is, Germany, Japan, the USA and the UK, with varying levels of significance. The panel data analysis has shown that, as a group, the G-7 equity indices have a significant impact on the cryptocurrency index, suggesting promising opportunities for portfolio diversification across these economies.