An Empirical Investigation of Volatility Dynamics in the Cryptocurrency Market

29 Pages Posted: 16 Jul 2018

See all articles by Paraskevi Katsiampa

Paraskevi Katsiampa

Sheffield University Management School

Date Written: June 25, 2018

Abstract

Despite warnings issued by different financial institutions, cryptocurrencies are increasingly used for investment and speculation purposes. However, little is known about interdependencies within cryptocurrency markets. By employing an asymmetric Diagonal BEKK model, this paper examines volatility dynamics of five major cryptocurrencies, namely Bitcoin, Ether, Ripple, Litecoin and Stellar Lumen, while accounting for asymmetric effects of positive and negative shocks in their conditional variances and covariances. It is shown that the conditional variances of all the five cryptocurrencies considered in this study are significantly affected by both previous squared errors and past conditional volatility, with traders paying the most attention to news arriving in the Stellar Lumen market, while shocks persist the most in the Litecoin market. Moreover, in the case of Bitcoin, Ether, Ripple and Litecoin conditional volatility also captures asymmetric effects between good and bad news, while for Stellar Lumen asymmetric past shocks do not have a significant effect in the current conditional variance. Similar results are obtained for the cryptocurrencies' conditional covariances which are significantly affected by cross products of previous error terms and past covariance terms - supporting the findings of previous studies on interdependencies within cryptocurrency markets - while capturing asymmetric effects of past shocks accordingly. Furthermore, it is shown that time-varying conditional correlations exist and are mostly positive. Finally, it is demonstrated that conditional volatility and correlations are responsive to major news related to cryptocurrencies. The results improve our understanding of interdependencies between cryptocurrencies and thus have important implications to both cryptocurrency users and investors.

Keywords: Bitcoin, Cryptocurrency, Asymmetric Diagonal BEKK, MGARCH, Volatility, Conditional Correlations

JEL Classification: C32, C5, G1

Suggested Citation

Katsiampa, Paraskevi, An Empirical Investigation of Volatility Dynamics in the Cryptocurrency Market (June 25, 2018). Available at SSRN: https://ssrn.com/abstract=3202317 or http://dx.doi.org/10.2139/ssrn.3202317

Paraskevi Katsiampa (Contact Author)

Sheffield University Management School ( email )

17 Mappin Street
Sheffield, Sheffield S1 4DT
United Kingdom

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