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

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Bitcoin; EGARCH; event analysis; Reuters news; VIX; EPU; ﬁnancial markets (search for similar items in EconPapers)
JEL-codes: C22 C52 E52 F31 G12 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-mac, nep-mon and nep-pay
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:89445

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