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Exploring the driving forces of the Bitcoin currency exchange rate dynamics: an EGARCH approach

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  • Siwen Zhou

    (University of Hamburg)

Abstract

Bitcoin is a virtual currency scheme that is characterised by a decentralised network and cryptographic transfer verification. It has attracted much public attention due to its innovative technology and its high currency 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 specific events play a critical role in the formation of its exchange rate. Second, the impact on Bitcoin of regulation-related events indicates that market sentiment responds to market regulation statements. Third, news coverage is an essential factor in driving its volatility. Fourth, Bitcoin can be a hedge in times of low uncertainty in global financial markets and can also serve as a safe haven against high economic uncertainty worldwide, but with increasing global financial uncertainty, it is likely to move with the markets and therefore cannot serve as a hedge or safe haven against stock market crashes. Lastly, the positive effect of global expansionary monetary policy on Bitcoin’s exchange rate is marginal enough to rule out the involvement of central banks worldwide in the inflation of Bitcoin’s exchange rate over the years, as may have been the case with many asset prices after the 2008 US financial crisis.

Suggested Citation

  • Siwen Zhou, 2021. "Exploring the driving forces of the Bitcoin currency exchange rate dynamics: an EGARCH approach," Empirical Economics, Springer, vol. 60(2), pages 557-606, February.
  • Handle: RePEc:spr:empeco:v:60:y:2021:i:2:d:10.1007_s00181-019-01776-4
    DOI: 10.1007/s00181-019-01776-4
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    More about this item

    Keywords

    Bitcoin; EGARCH; Event analysis; Reuters news; Financial markets;
    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
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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