Long- and Short-Term Cryptocurrency Volatility Components: A GARCH-MIDAS Analysis
24 Pages Posted: 26 Apr 2018 Last revised: 11 May 2018
Date Written: May 6, 2018
We use the GARCH-MIDAS model to extract the long- and short-term volatility components of cryptocurrencies. As potential drivers of Bitcoin volatility, we consider measures of volatility and risk in the US stock market as well as a measure of global economic activity. We find that S&P 500 realized volatility has a negative and highly significant effect on long-term Bitcoin volatility. The finding is atypical for volatility co-movements across financial markets. Moreover, we find that the S&P 500 volatility risk premium has a significantly positive effect on long-term Bitcoin volatility. Finally, we find a strong positive association between the Baltic dry index and long-term Bitcoin volatility. This result shows that Bitcoin volatility is closely linked to global economic activity. Overall, our findings can be used to construct improved forecasts of long-term Bitcoin volatility.
Keywords: Baltic dry index, Bitcoin volatility, digital currency, GARCH-MIDAS, pro-cyclical volatility, volume
JEL Classification: C53, C58, F31, G15
Suggested Citation: Suggested Citation