Correlation and causality between the S&P 500 and Bitcoin: A comparative study before and during the COVID-19 pandemic

Abstract

This undergraduate dissertation examines the correlation and causality between the S&P 500 and Bitcoin, both prior to and amidst the COVID-19 pandemic. The objective of this research is to offer novel perspectives on the interaction between these two financial instruments during the unprecedented economic instability triggered by the pandemic and to assess how their association has evolved throughout this time. By scrutinizing price fluctuations and the interconnections during distinct phases, this investigation seeks to enhance comprehension of how investors might optimally distribute their resources across these asset categories during periods of economic uncertainty. The study is grounded in earlier investigations on the correlation and causation between the S&P 500 and Bitcoin, as well as their roles during economic downturns. Employing quantitative research techniques, this study explores the transformation in the correlation and causality between the two assets during the pandemic, utilizing data obtained from reputable sources and analyzed using statistical software. The Pearson correlation coefficient and Granger causality test serve as instruments for evaluating the correlation and causation between the S&P 500 and Bitcoin across the specified timeframes. The findings of this research contribute to a more refined and all-encompassing comprehension of how the influence of the S&P 500 and Bitcoin exert on each other under varying economic circumstances and how their dynamics can shift during significant economic upheavals, such as the COVID-19 pandemic. This knowledge will aid investors in making well-informed choices and comprehending how to diversify their portfolios during similar occurrences in the future. Furthermore, the study offers recommendations for subsequent research in this domain and deliberates on its constraints.