Modeling of the Bitcoin Volatility through Key Financial Environment Variables: An Application of Conditional Correlation MGARCH Models

Abstract

Since the launch of Bitcoin, there has been a lot of controversy surrounding what asset class it is. Several authors recognize the potential of cryptocurrencies but also certain deviations with respect to the functions of a conventional currency. Instead, Bitcoin’s diversifying factor and its high return potential have generated the attention of portfolio managers. In this context, understanding how its volatility is explained is a critical element of investor decision-making. By modeling the volatility of classic assets, nonlinear models such as Generalized Autoregressive Conditional Heteroskedasticity (GARCH) offer suitable results. Therefore, taking GARCH(1,1) as a reference point, the main aim of this study is to model and assess the relationship between the Bitcoin volatility and key financial environment variables through a Conditional Correlation (CC) Multivariate GARCH (MGARCH) approach. For this, several commodities, exchange rates, stock market indices, and company stocks linked to cryptocurrencies have been tested. The results obtained show certain heterogeneity in the fit of the different variables, highlighting the uncorrelation with respect to traditional safe haven assets such as gold and oil. Focusing on the CC-MGARCH model, a better behavior of the dynamic conditional correlation is found compared to the constant.

Information Flow between Global Equities and Cryptocurrencies: A VMD‐Based Entropy Evaluating Shocks from COVID‐19 Pandemic

“…e arbitrage pricing theory, projected by Ross [19], asserts that stock returns are theorised to be influenced by several factors and had been confirmed by extant literature [20,21]. Furthermore, prior literature offers an indication that the stock market returns are influenced by four main factors [12]. ese are the fundamental factors, earning base [22]; the technical factors that encompass diverse macroeconomic factors [23]; market sentiment factors, animal spirits of investors and environmental context [24]; and market anomalies [25].…”

“…e popularity of cryptocurrencies increased at the advent of the European sovereign debt crisis of 2010-2013 [12]. e market size of cryptocurrencies has not stopped growing; in January 2018, market capitalization peaked at USD 800 billion as compared to a little above USD 10 billion in 2013 [12,13]. Notwithstanding, in September 2018, cryptocurrency markets faced extreme price instability which resulted in an 80% loss of their values [14].…”

Exploring the Driving Forces of Stock-Cryptocurrency Comovements during COVID-19 Pandemic: An Analysis Using Wavelet Coherence and Seemingly Unrelated Regression

“…This finding is among evidence positioning Bitcoin as one of the safe haven assets against stocks before the pandemic. Another study [27] provides evidence and a decent review of previous studies that corroborate the evidence in [26]. The attention to cryptocurrencies, particularly their safe haven properties, has propelled during the COVID-19 pandemic.…”

“…Their demand grew even stronger after the introduction of Bitcoin futures in December 2017. A study by [26] examines the volatility of Bitcoin against global financial assets (GFAs, i.e., gold, oil, US$/EUR) from December 2016 to December 2018. Using variants of the Multivariate Generalized Autoregressive Conditional Heteroskedasticity (MGARCH) model, the study finds that Bitcoin negatively correlates with stocks (SP500 and N225), gold, and US$/EUR.…”

Principles of Natural Resource Economics for Bitcoin

“…Prateek Goorha is the main author responsible for writing the manuscript, collecting data, proofreading, etc. 10 Most recently, [11] shows uncorrelation between Bitcoin and both gold and oil and correlation with stocks of companies associated with cryptocurrencies and electronic payment systems.…”