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Global economic policy uncertainty and the stability of cryptocurrency returns: The role of liquidity volatility

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  • Zhang, Pengcheng
  • Kong, Deli
  • Xu, Kunpeng
  • Qi, Jiayin

Abstract

This paper examines the influence of global economic policy uncertainty on the stability of cryptocurrency returns and the moderating role of liquidity volatility. Findings reveal that the stability of cryptocurrency returns is higher when economic policy uncertainty is higher, implying that cryptocurrencies may be perceived as a safe-haven asset against economic policy uncertainty during the sample period. More importantly, investors in the cryptocurrency market perceive liquidity volatility as liquidity risk, and cryptocurrencies will no longer be a safe haven against economic policy uncertainty when liquidity volatility is high. Further research shows that investors tend to ignore the risks associated with liquidity volatility when the stock market is in a fearful mood or the cryptocurrency market is in a greedy mood. Furthermore, during the COVID-19 pandemic, investors became more concerned about liquidity volatility in cryptocurrencies, suggesting a rise in risk aversion.

Suggested Citation

  • Zhang, Pengcheng & Kong, Deli & Xu, Kunpeng & Qi, Jiayin, 2024. "Global economic policy uncertainty and the stability of cryptocurrency returns: The role of liquidity volatility," Research in International Business and Finance, Elsevier, vol. 67(PB).
    • Handle: RePEc:eee:riibaf:v:67:y:2024:i:pb:s027553192300291x
    DOI: 10.1016/j.ribaf.2023.102165
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    Keywords

    Cryptocurrency; Liquidity volatility; Safe haven; Economic Policy Uncertainty (EPU); Investor sentiment;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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