Is there any correlation between digital currency price fluctuation? Based on the DCC-GARCH and wavelet coherence analysis

The existing studies rarely reveal the reasons for the digital currency price fluctuation from the perspective of internal interaction and contagion. Therefore, to fill this research gap, this paper comprehensively adopts the dynamic conditional correlation (DCC-) GARCH model and wavelet coherence analysis (WTC) to reveal the internal correlation and formation reasons of digital currency price fluctuations. Our research has the following findings: (1) the price fluctuations of digital currency are highly related. Through the observation of the dynamic conditional correlation coefficient graph, it is found that the price fluctuations have a strong time-varying trend, manifested as a ‘contagious’ characteristic. (2) During the outbreak of COVID-19, most digital currencies have shown positive resonance in the short, medium, and long term, suggesting that the COVID-19 pandemic has increased the correlation and contagion of digital currency price fluctuations. (3) In the short term, Bitcoin is the main ‘contagious source’ of digital currency price fluctuation. But in the medium and long term, Ethereum and Ripple, which are closely related to the real economy, have a greater impact and become the new ‘contagious source’. Generally speaking, Bitcoin, Ethereum, and Ripple are the internal causes of instability in the digital currency market. Finally, based on the empirical conclusion, this paper proposes that the digital currency portfolio should be optimized to meet the investment demand; strengthen digital currency regulatory cooperation, and improve regulatory efficiency. Let the digital currency return to the ‘currency’ attribute and serve the real economy.