Long- and Short-Term Cryptocurrency Volatility Components: A GARCH-MIDAS Analysis

24 Pages Posted: 26 Apr 2018 Last revised: 11 May 2018

See all articles by Christian Conrad

Christian Conrad

Heidelberg University - Faculty of Economics and Social Studies

Anessa Custovic

University of North Carolina (UNC) at Chapel Hill - Department of Economics, Students

Eric Ghysels

University of North Carolina Kenan-Flagler Business School; University of North Carolina (UNC) at Chapel Hill - Department of Economics

Date Written: May 6, 2018

Abstract

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

Conrad, Christian and Custovic, Anessa and Ghysels, Eric, Long- and Short-Term Cryptocurrency Volatility Components: A GARCH-MIDAS Analysis (May 6, 2018). Available at SSRN: https://ssrn.com/abstract=3161264 or http://dx.doi.org/10.2139/ssrn.3161264

Christian Conrad (Contact Author)

Heidelberg University - Faculty of Economics and Social Studies ( email )

Bergheimer Strasse 58
Heidelberg, D-69115
Germany
+49 (0)6221 54 3173 (Phone)

HOME PAGE: http://www.uni-heidelberg.de/conrad

Anessa Custovic

University of North Carolina (UNC) at Chapel Hill - Department of Economics, Students ( email )

Chapel Hill, NC
United States

Eric Ghysels

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Gardner Hall, CB 3305
Chapel Hill, NC 27599
United States
919-966-5325 (Phone)
919-966-4986 (Fax)

HOME PAGE: http://www.unc.edu/~eghysels/

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