Exploring the Driving Forces of the Bitcoin Exchange Rate Dynamics: An EGARCH Approach

Zhou, Siwen (2018): Exploring the Driving Forces of the Bitcoin Exchange Rate Dynamics: An EGARCH Approach.

Abstract

Bitcoin is a virtual currency scheme that is characterised by a decentralised network and cryptographic transfer verification which has been attracting much public attention due to its technological innovation and its high exchange rate volatility. In this paper, Bitcoin’s exchange rate movement from 2011 to 2018 and its relationship with the global financial markets are explored using an EGARCH framework. The results are as follows. First, fundamentals and Bitcoin-related events play a critical role in the exchange rate formation of Bitcoin. Second, the impact of regulation-related events on Bitcoin indicates that market sentiment is responding to market regulation statements. Third, news coverage is an essential factor in driving the volatility of Bitcoin. Fourth, Bitcoin may be a hedge in times of calm financial markets and a safe haven against uncertain economic policy but is likely to expose to flight-to-quality as global financial uncertainty increases. Lastly, the positive effect of the central bank’s announcements on Bitcoin is marginal enough to rule out the involvement of global expansionary monetary policy in inflating Bitcoin’s exchange rate over the past years, as it may have been the case with traditional asset prices after the great recession.

• Item Type: MPRA Paper
• Language: English
• Keywords: Bitcoin, EGARCH, event analysis, Reuters news, VIX, EPU, financial markets
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C52 - Model Evaluation, Validation, and Selection; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; F - International Economics > F3 - International Finance > F31 - Foreign Exchange; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates

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