The contagion effects of the COVID-19 pandemic: Evidence from gold and cryptocurrencies

TLDR

Chinese financial markets were the epicenter of both physical and financial contagion at the start of the 2020 COVID‑19 pandemic. The authors explain why this contagion occurred through several observations. The analysis shows flight‑to‑safety behavior and a significant shift in volatility linkages between Chinese stock markets and Bitcoin, suggesting that Bitcoin’s dynamic correlations during stress provide diversification benefits for mainstream portfolios.

Abstract

At the beginning of the 2020 global COVID-2019 pandemic, Chinese financial markets acted as the epicentre of both physical and financial contagion. Our results indicate that a number of characteristics expected during a "flight to safety" were present during the period analysed. The volatility relationship between the main Chinese stock markets and Bitcoin evolved significantly during this period of enormous financial stress. We provide a number of observations as to why this situation occurred. Such dynamic correlations during periods of stress present further evidence to cautiously support the validity of the development of this new financial product within mainstream portfolio design through the diversification benefits provided.