Economic fundamentals or investor perceptions? The role of uncertainty in predicting long-term cryptocurrency volatility

This paper investigates the impacts of News-based Implied Volatility (NVIX) on the long-term volatility of five cryptocurrencies using the GARCH-MIDAS model. We also evaluate the hedging effectiveness of cryptocurrencies against the S&P 500 index after incorporating NVIX. The empirical results show that NVIX has a negative and significant impact on the long-term volatility of five cryptocurrencies. The impact of NVIX remains robust even after controlling for Global Economic Policy Uncertainty (GEPU) and Realized Volatility (RV). The uncertainty derived from investor perception is more important than the uncertainty of economic fundamentals in predicting cryptocurrency volatility. The hedging effectiveness of Bitcoin against the S&P 500 index is improved due to consideration of NVIX. This paper provides new evidence concerning the impacts of uncertainty on the volatility of cryptocurrencies.     

Volatility cascades in cryptocurrency trading

This paper studies volatility cascades across multiple trading horizons in cryptocurrency markets. Using one-minute data on Bitcoin, Ethereum and Ripple against the US dollar, we implement the wavelet Hidden Markov Tree model. This model allows us to estimate the transition probability of high or low volatility at one time scale (horizon) propagating to high or low volatility at the next time scale. We find that when moving from long to short horizons, volatility cascades tend to be symmetric: low volatility at long horizons is likely to be followed by low volatility at short horizons, and high volatility is likely to be followed by high volatility. In contrast, when moving from short to long horizons, volatility cascades are strongly asymmetric: high volatility at short horizons is now likely to be followed by low volatility at long horizons. These results are robust across time periods and cryptocurrencies.     

News sentiment in the cryptocurrency market: An empirical comparison with Forex

We use high frequency intra-day data to investigate the influence of unscheduled currency and Bitcoin news on the returns, volume and volatility of the cryptocurrency Bitcoin and traditional currencies over the period from January 2012 to November 2018. Results show that Bitcoin behaves differently to traditional currencies. Traditional currencies typically experience a decrease in returns after negative news arrivals and an increase in returns following positive news whereas Bitcoin reacts positively to both positive and negative news. This suggests investor enthusiasm for Bitcoin irrespective of the sentiment of the news. This phenomenon is exacerbated during bubble periods. Conversely, cryptocurrency cyber-attack news and fraud news dampen this effect, decreasing Bitcoin returns and volatility. Our results contribute to the discussion on the nature of Bitcoin as a currency or an asset. They further inform practitioners about the characteristics of cryptocurrencies as a financial asset and inform regulators about the influence of news on Bitcoin volatility, particularly during bubble periods.     

Time and frequency dynamics of connectedness and hedging performance in global stock markets: Bitcoin versus conventional hedges

Some studies have revealed the hedging ability of Bitcoin against stock markets, but the knowledge of how it compares with other hedges is in its infancy. This paper presents the first study on time-frequency domain connectedness and hedging among five hedges (Bitcoin, crude oil, commodities, gold and the U.S. dollar (USD) index) and four stock indices (developed markets ex U.S., emerging markets ex China, U.S. and China). We find that the connectedness between hedges and stock markets varies by time across time horizons. Specifically, the connectedness between Bitcoin and stock indices is the smallest among all hedges, especially for the short horizon. Gold and USD are isolated from other markets at longer horizons. The hedging ratio, optimal portfolio weights and hedging effectiveness also vary across investment horizons. For short-term investment, gold has better hedging effectiveness, especially for emerging stock markets and the U.S. stock market. For median- and long-term investment, USD has better performance, especially for developed markets ex U.S. and emerging stock markets. Additionally, although Bitcoin has good hedging properties, it has high volatility compared with other hedging assets. In other words, if Bitcoin is included in a portfolio, investors should pay attention to its wide variation. These empirical findings highlight the important role that gold and USD play in hedging against global stock markets.     

Does Bitcoin still own the dominant power? An intraday analysis

The study investigates the intraday dynamics and price patterns of the primary cryptocurrencies. The Granger Mackey-Glass (M-G) model is employed to examine the asymmetric and nonlinear dynamic interactions in the first moment using positive and negative returns. The bivariate BEKK-GARCH model is applied to identify cross-market volatility shocks and volatility transmissions in the cryptocurrency market. The intra-cryptocurrency market analysis reveals that Bitcoin contains predictive information that can nonlinearly forecast the performance of other digital currencies when cryptocurrency prices either are rising or declining. The dominant power of Bitcoin is not dismissed using the intraday data. Further, Bitcoin's intraday lagged shocks and volatility induces more rapid and destabilizing effects on the conditional volatility of other currencies than each of the other currencies does on BTC's conditional volatility. The virtual currency markets are dynamically correlated and integrated through first and second-moment spillovers.     

Investor attention in cryptocurrency markets

We examine the relationship between investor attention, and measures of uncertainty, with the market dynamics of Bitcoin and other cryptocurrencies. We find that increases in investor attention are associated with higher returns, more volatility, and greater illiquidity in cryptocurrency markets. In contrast, cryptocurrency uncertainty (UCRY) and financial market uncertainty (VIX) are also positively related to volatility and illiquidity but have a negative contemporaneous relationship with returns. The identified relationships are accentuated during the COVID-pandemic, and are robust to different measures of investor attention, volatility, and illiquidity. Our results suggest that monitoring investor attention could assist both investors and policymakers.     

Investigating the nature of interaction between crypto-currency and commodity markets

This paper investigates the dynamic relationship and volatility spillovers between cryptocurrency and commodity markets using different multivariate GARCH models. We take into account the nature of interaction between these markets and their transmission mechanisms when analyzing the conditional cross effects and volatility spillovers. Our results confirm the presence of significant returns and volatility spillovers, and we identify the GO-GARCH (2,2) as the best-fit model for modeling the joint dynamics of various financial assets. Our findings show significant dynamic linkages and volatility spillovers between gold, natural gas, crude oil, Bitcoin, and Ethereum prices. We find that gold can serve as a safe haven in times of economic uncertainty, as it is a good hedge against natural gas and crude oil price fluctuations. We also find evidence of bidirectional causality between crude oil and natural gas prices, suggesting that changes in one commodity's price can affect the other. Furthermore, we observe that Bitcoin and Ethereum are positively correlated with each other, but negatively correlated with gold and crude oil, indicating that these cryptocurrencies may serve as useful diversification tools for investors seeking to reduce their exposure to traditional assets. Our study provides valuable insights for investors and policymakers regarding asset allocation and risk management, and sheds light on the dynamics of financial markets.     

Correlations among cryptocurrencies: Evidence from multivariate factor stochastic volatility model

This paper is the first study to apply the multivariate factor stochastic volatility model (MFSVM) for analyzing the correlations among six cryptocurrencies. We use MFSVM with the Bayesian estimation procedure for the period from August 8, 2015, to January 1, 2020. According to the findings, there is a significant positive correlation between price volatility values of Bitcoin and Litecoin. Besides, the volatility values of Ethereum have a positive correlation with both Ripple and Stellar. There is also a positive correlation between the volatility values of Ripple and Dash. These findings are robust to consider different correlation networks. The evidence implies that Bitcoin is mainly related to Litecoin, but Ethereum is associated with other cryptocurrencies.     

Nonlinear tail dependence in cryptocurrency-stock market returns: The role of Bitcoin futures

We investigate the median and tail dependence between cryptocurrency and stock market returns of BRICS and Developed countries using a newly developed nonparametric cumulative measure of dependence over the period January 4, 2016 – December 31, 2019 as well as before and after the introduction of Bitcoin futures on December 17, 2017. The new measure is model-free and permits measuring tail risk. The results highlight the leading role of S&P500, Nasdaq and DAX 30 in predicting BRICS and developed countries’ stock market returns. Among BRICS countries, BVSP shows a starring role in predicting stock market returns. BSE 30 is the most predictor of cryptocurrencies, which have a little predictability on stock market returns. Ethereum has the leading role in predicting cryptocurrencies and stock market returns followed by Bitcoin. Tail dependence shows substantial role of S&P500, Nasdaq and BVSP in predicting stock market returns. Subsample analysis show the role of Bitcoin futures in reshaping the mean and tail dependence between cryptocurrency and stock market returns. Our results have important policy implications for portfolio managers, hedge funds and investors.     

Cryptocurrencies: Stylized facts on a new investible instrument

We present stylized facts on the asset pricing properties of cryptocurrencies: summary statistics on cryptocurrency return properties and measures of common variation for secondary market returns on 222 digital coins. In our sample, secondary market returns of all other currencies are strongly correlated with Bitcoin returns. We also provide some investment characteristics of a sample of 64 initial coin offerings.     

Are cryptocurrencies homogeneous?

This article investigates if cryptocurrencies returns' are similarly affected by a selection of demand- and supply-side determinants. Homogeneity among cryptocurrencies is tested via a least absolute shrinkage and selection operator (LASSO) model where determinants of Bitcoin returns are applied to a sample of 12 cryptocurrencies. The analysis goes beyond existing research by simultaneously covering different periods and design choices of cryptocurrencies. The results show that cryptocurrencies are heterogeneous, apart from some similarities in the impact of technical determinants and cybercrime. The cryptocurrency market displays evidence of substitution effects, and design choices related explain the impact of the determinants of return.     

Return and volatility co-movement in commodity futures markets: the effects of liquidity risk

Commodity markets are a widely researched topic in the field of finance. In this paper, we investigate the co-movement of return and volatility measures in different commodity futures markets and how these measures are affected by liquidity risk. First, we find that commodity returns display co-movement and that liquidity risk plays a key role in shaping asset return patterns. Moreover, we show that the volatilities of commodity returns co-move, and we demonstrate the role of liquidity risk in this joint pattern. We also find that the commodity markets we investigated share a common volatility factor that determines their joint volatility co-movement. Because liquidity risk affects both commodity returns and volatility shocks, it might be interpreted as the common causal factor driving both measures simultaneously. Therefore, we affirm the view that liquidity shocks are firmly related to two residual risks originating from both market return and market volatility. Finally, we also show that liquidity spillovers can significantly drive cross-sectional correlation dynamics.     

Asymmetric volatility in the cryptocurrency market: New evidence from models with structural breaks

Previous literature shows that major cryptocurrencies exhibit inverse asymmetric volatility: positive shocks increase price volatility more than negative ones. In this study, we revisit the asymmetric volatility dynamics of major cryptocurrencies using asymmetric GARCH models that incorporate endogenously detected structural breaks. Our results show that after incorporating structural breaks, volatility persistence decreases and asymmetric volatility increases for all cryptocurrencies in this study. Thus, prior research that ignores structural breaks underestimates the impact of unexpected news on price volatility in cryptocurrency markets. We also present important economic implications of our results: ignoring structural breaks adversely affects the hedging strategies, derivatives valuations, and risk exposure measurement of investors in cryptocurrency markets.     

Are cryptocurrencies a safe haven for equity markets? An international perspective from the COVID-19 pandemic

The COVID-19 pandemic provided the first widespread bear market conditions since the inception of cryptocurrencies. We test the widely mooted safe haven properties of Bitcoin, Ethereum and Tether from the perspective of international equity index investors. Bitcoin and Ethereum are not a safe haven for the majority of international equity markets examined, with their inclusion adding to portfolio downside risk. Only investors in the Chinese CSI 300 index realized modest downside risk benefits (contingent on very limited allocations to Bitcoin or Ethereum). As Tether successfully maintained its peg to the US dollar during the COVID-19 turmoil, it acted as a safe haven investment for all of the international indices examined. We caveat the latter findings with a warning that Tether's dollar peg has not always been maintained, with evidence of impaired downside risk hedging properties earlier in our sample.     

Limitations of imitation: Lessons from another Bitcoin copycat

We find strong evidence that imitation to the leader in an uncertain environment provides short-term early success without enhancing long-term survival. Using a unique setting in cryptocurrencies where Bitcoin has been the centre focus, we define copycats as cryptocurrencies that have a name similar to Bitcoin. Our results show copycats earn higher returns in the first day and first week of trading but have a lower survival rate comparing to non-copycats and are robust to alternative definitions of copycat and an instrumental variable. Our results highlight that in an uncertain market created by a novel technology, the name of an organization may be a strong signal to investors when other signals are unclear.     

“Shiny” crypto assets: A systemic look at gold-backed cryptocurrencies during the COVID-19 pandemic

In this paper, we empirically analyse the performance of five gold-backed stablecoins during the COVID-19 pandemic and compare them to gold, Bitcoin and Tether. In the digital assets' ecosystem, gold-backed cryptocurrencies have the potential to address regulatory and policy concerns by decreasing volatility of cryptocurrency prices and facilitating broader cryptocurrency adoption. We find that during the COVID-19 pandemic, gold-backed cryptocurrencies were susceptible to volatility transmitted from gold markets. Our results indicate that for the selected gold-backed cryptocurrencies, their volatility, and as a consequence, risks associated with volatility, remained comparable to the Bitcoin. In addition, gold-backed cryptocurrencies did not show safe-haven potential comparable to their underlying precious metal, gold.     

Hedging role of stablecoins

Wild price fluctuations of cryptocurrencies make it difficult for investors to maintain stable asset values. This study investigates the hedging properties of US dollar (USD)-pegged stablecoins against bitcoin returns. We analyzed the hedging abilities of the three largest stablecoins—namely, Tether, USD Coin, and Binance USD—using the dynamic conditional correlation–generalized autoregressive conditional heteroskedasticity, dummy variable regression, vector autoregression, and impulse response functions. We found that stablecoins are generally negatively correlated with bitcoin returns, indicating that they can be effective hedging instruments against high-volatility crypto assets. Among the stablecoins, Binance USD offers the largest risk reduction, and Tether was a weak safe haven during the COVID-19 crisis period. Crypto investors can diversify their portfolios by holding stablecoins.     

Does bitcoin co-move and share risk with Sukuk and world and regional Islamic stock markets? Evidence using a time-frequency approach

This paper examines the co-movements between Bitcoin (BTC) and the Dow Jones World Stock Market Index, regional Islamic stock markets, and Sukuk markets. We apply cross wavelet transform and wavelet coherence analysis with a wavelet-based measure of value at risk. The co-movement is stronger and in the same direction at lower frequencies, suggesting the benefits from diversification with BTC are relatively less for long-term investors compared to short-term investors. Co-movement in the opposite direction at high frequencies implies better benefits of hedging in the short run through diversification in BTC and Islamic equity markets. Robustness tests show that the correlations increase as we increase from an investment horizon of two days to one of 64 days. The frequency-domain causality test shows significant causality flow from BTC to the Islamic market of Asia-Pacific, Japan, and Sukuk markets in the short term. Additionally, BTC is found to lead Asia-Pacific Islamic stock markets in the long term. Finally, we note that the benefits of portfolio diversification with BTC and Islamic assets vary across time and frequencies.     

Pricing methods and hedging strategies for volatility derivatives

We explore the valuation and hedging of discretely observed volatility derivatives using three different models for the price of the underlying asset: Geometric Brownian motion with constant volatility, a local volatility surface, and jump-diffusion. We begin by comparing the effects on valuation of variations in contract design, such as the differences between specifying log returns or actual returns and incorporating caps on the level of realized volatility. We then focus on the difficulties associated with hedging these products. Delta hedging strategies are ineffective for hedging volatility derivatives since they require very frequent rebalancing. Moreover, they provide limited protection in the jump-diffusion context. We study the performance of a hedging strategy for volatility swaps that establishes small, fixed positions in vanilla options at each volatility observation.     

Does global economic uncertainty matter for the volatility and hedging effectiveness of Bitcoin?

We assess whether the long-run volatilities of Bitcoin, global equities, commodities, and bonds are affected by global economic policy uncertainty. Empirical results provide evidence supporting this hypothesis, except in the case of bonds. For Bitcoin investors, the results imply the ability to use information about the state of global economic uncertainty to enhance the predictions of Bitcoin volatility. We further examine whether the correlation between Bitcoin and global equities, commodities, and bonds are affected by global economic policy uncertainty. Empirical results reveal that global economic policy uncertainty has a negative significant impact on the Bitcoin-bonds correlation and a positive impact on both Bitcoin-equities and Bitcoin-commodities correlations, suggesting the possibility of Bitcoin acting as a hedge under specific economic uncertainty conditions. Interestingly, the hedging effectiveness of Bitcoin for both global equities and global bonds enhances slightly after considering the level of global economic policy uncertainty. Such a weak effect of the state of global economic uncertainty on the hedging ability of Bitcoin implies that investors cannot substantially enhance the hedging performance of Bitcoin under different economic uncertainty conditions.