Short and Long-Run Association between Crude Oil and Cryptocurrency: An Insight of Vector Error Correction Model

ABSTRACT

It is co-movement or cointegration among asset classes that assist investors in acting as a safeguard in the financial market from a well-diversified portfolio. There are tremendous amounts which are parked in crude oil and cryptocurrency. This paper investigates the short and long-run association of crude oil with cryptocurrency. The proxies of cryptocurrency are Bitcoin, Ethereum and Tether. We collect the monthly observations of these constituent series extending from December 2017 to February 2021. For empirical analysis, we apply the Johansen cointegration test, Vector Error Correction Model (VECM) and Impulse Response Function (IRF) to examine the relationship. Johansen cointegration test is employed to check cointegration when we have more than two variables, and VECM helps to know the short-run dynamic adjustment. The result reveals that there is long-run causality in crude oil derived from Bitcoin, Ethereum and Tether but not short-run causality. It implies to the investors and portfolio managers that they can only diversify their investment in this two-asset class in a short period.