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

34 Pages Posted: 25 Jun 2019

See all articles by Klaus Grobys

Klaus Grobys

University of Vaasa

Niranjan Sapkota

University of Vaasa

Date Written: March 8, 2019

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

Suggested Citation

Grobys, Klaus and Sapkota, Niranjan, Contagion of Uncertainty: Transmission of Risk from the Cryptocurrency Market to the Foreign Exchange Market (March 8, 2019). Available at SSRN: https://ssrn.com/abstract=3407178 or http://dx.doi.org/10.2139/ssrn.3407178

Klaus Grobys (Contact Author)

University of Vaasa ( email )

P.O. Box 700
Wolffintie 34
FIN-65101 Vaasa
Finland

Niranjan Sapkota

University of Vaasa ( email )

P.O. Box 700
FIN-65101 Vaasa, FI-65101
Finland

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