Contagion of Uncertainty: Transmission of Risk from the Cryptocurrency Market to the Foreign Exchange Market

Abstract

Earlier research documented that cryptocurrencies, including Bitcoin, have experienced dramatic fluctuations in both market capitalization and market share in recent years. Unsurprisingly, Bitcoin returns exhibit higher volatility than traditional G-10 currencies. Our paper extends earlier research and investigates the potential impact of news originating from the Bitcoin market. Confirming earlier studies, we find that Bitcoin exhibits dramatically higher volatility than the dollar factor. Surprisingly, our findings indicate that only hacking incidents that occur in the Bitcoin market result in high levels of co-movement in the risk of both markets the cryptocurrency and the G-10 currency market, whereas good news do not have such effects. Our findings may serve as an important tool for guiding policy makers who target financial stability across markets.

Keywords: Cryptocurrency, Bitcoin, Volatility Spillover, Foreign Exchange, G10 Currency

JEL Classification: G12, G14