Giver and the receiver: Understanding spillover effects and predictive power in cross-market Bitcoin prices

Abstract

We identify and characterise the 'givers and the receivers' of volatility in crossmarket Bitcoin prices and discuss international diversification strategies in this context. Using both time and frequency domain mechanisms, we provide estimates of outward and inward spillover effects. These have implications for (weak-form) crossmarket inefficiency. In our setting, we treat high-degree of spillover as an indicator of weak-form inefficiency because investors can utilise information on the dynamic spillover effects to produce a best long-run prediction of the market. Our results show that Bitcoin prices depict strong (dynamic) spillover in volatility, especially during episodes of high uncertainty. The Bitcoin-USD exchange rate possesses net predictive power, mirrored by the tendency of the Bitcoin-EURO market as a net receiver relative to other markets. Robustness exercise generally supports our claim. The overall implication is that during episodes of high uncertainty, Bitcoin markets depict greater dynamic inefficiency, instrumenting the role of asymmetric information in the path-dependence and predictive power of Bitcoin prices in an interdependent market.

The impact of economic uncertainty caused by COVID-19 on renewable energy stocks

“…This result agrees well with the previous literature (Tiwari et al 2018 ; Balli et al 2019 ; Gillaizeau et al 2019 ) that the return spillovers in a system appear in the short term, while volatility spillovers are found in the long term when spillovers are decomposed into different frequency bands via the Baruník–Křehlík methodology. For example, Gillaizeau et al ( 2019 ) identified connectedness in cross-market Bitcoin prices with both time- and frequency-domain mechanisms. They also found that overall volatility spillovers in the system were much higher in the long term than in the short term, while overall returns spillovers mainly focused on the short term.…”

“…Second, in the frequency-domain analysis, the main total spillovers from economic uncertainty to renewable energy stock returns are concentrated at a high frequency, while the main total spillovers to renewable energy stock volatilities appear at low frequencies. These findings are consistent with previous research (Tiwari et al 2018 ; Balli et al 2019 ; Gillaizeau et al 2019 ), which demonstrated that information transmission from economic uncertainty to renewable energy stock returns is faster than that to volatilities for only about one week, while the shocks of economic uncertainty have a long-lasting effect on renewable energy volatilities.…”

A Survey on Empirical Findings about Spillovers in Cryptocurrency Markets

“…A number of advanced econometric techniques have been employed in order to investigate the interconnectedness among financial assets. Vector autoregressive (VAR) schemes based on Diebold and Yilmaz (2009) and forecast error variance decomposition (FEVD) based on Diebold and Yilmaz (2012) as in Gillaizeau et al (2019) are employed. They define that "spillovers" is the fraction of the H-step ahead error variances in forecasting x_i arising from shocks to x_j, for i j.…”

“…Findings document that no significant spillover impacts exist between the market of digital currencies and the markets of traditional assets. As regards Gillaizeau et al (2019), they examine outward and inward volatility spillovers in cross-market Bitcoin prices by following the generalized variance decomposition procedure by Diebold and Yilmaz (2012) and frequency domain analysis. Exchange rates of Bitcoin in relation to USD, AUD, CAD, EUR, and the GBP are under scrutiny.…”

Is It Possible to Forecast the Price of Bitcoin?

“…For instance, in a recent paper, Aslanidis et al [37] detect that the correlation of traditional assets against Monero is even closer to zero than against other cryptocurrencies. Other papers investigate the correlation with different stocks, such as Fang et al [56], Gillaizeau et al [57], among others.…”