Can Bitcoin–Ethereum Return Divergence Explain Change in Cryptocurrency Market Connectedness? Evidence Across Distributional States
Juan Manuel Candelo-Viáfara, José Luis Duque-Ceballos, Laura Salas-ArbeláezThis paper examines whether Bitcoin–Ethereum return divergence is associated with changes in cryptocurrency market connectedness across distributional states. Daily returns for twelve cryptocurrencies (2018–2026) are analyzed using TVP-VAR connectedness, quantile regression, quantile-on-quantile regression, and quantile-on-quantile VAR connectedness. The market is highly integrated (average Total Connectedness Index of 80.10%, corrected 87.38%), with Ethereum and Bitcoin as primary net transmitters. Signed and absolute BTC–ETH return differentials convey distinct information: signed differentials matter only in selected regions, whereas absolute differentials show clear asymmetry where moderate divergence relates to lower changes in connectedness and larger divergence coincides with greater changes in connectedness. Predictive spillovers intensify toward distribution tails, with direct quantile configurations dominating. Relative BTC–ETH performance emerges as a state-dependent indicator of cryptocurrency market integration, with the informational relevance of return divergence magnitude and direction varying across distributional states.