Distant or Close Cousins: Connectedness Between Cryptocurrencies and Traditional Currencies Volatilities

Research Institute of Applied Economics, Working Paper 2019/12, 1/74

74 Pages Posted: 7 Aug 2019

See all articles by Julián Andrada Félix

Julián Andrada Félix

University of Las Palmas de Gran Canaria - Faculty of Economic Science

Adrian Fernandez-Perez

Auckland University of Technology

Simon Sosvilla-Rivero

UCM Institute for Economic Analysis

Date Written: July 3, 2019

Abstract

This paper examines the volatility interconnection between the main cryptocurrencies and traditional currencies during the period of February 2014-September 2018 using both a framework proposed by Diebold and Yilmaz (2014) and the modified approach of Antonakakis and Gabauer (2017). Our results suggest that a 34.43%, of the total variance of the forecast errors is explained by shocks across the eight examined cryptocurrencies and traditional currencies, indicating that the remainder 65.57% of the variation is due to idiosyncratic shocks. Furthermore, we find that volatility connectedness varies over time, with a surge during periods of increasing economic and financial instability. When we aggregate both markets by blocks, we find that the block of traditional currencies and the block of cryptocurrencies are mostly disconnected with periods of mild net volatility spill over between both blocks. Finally, our findings suggest that financial market variables are the main drivers of total connectedness within the traditional currencies, while the cryptocurrency-specific variables are identified as the key determinant for the total connectedness within the traditional currencies and a combination of business cycles and cryptocurrency-specific variables explain the directional volatility connectedness between both blocks.

Keywords: Exchange Rates, Cryptocurrencies, Connectedness, Time-Varying Parameters, Stepwise Regressions

JEL Classification: C53, E44, F31, G15

Suggested Citation

Andrada Félix, Julián and Fernandez-Perez, Adrian and Sosvilla-Rivero, Simon, Distant or Close Cousins: Connectedness Between Cryptocurrencies and Traditional Currencies Volatilities (July 3, 2019). Research Institute of Applied Economics, Working Paper 2019/12, 1/74. Available at SSRN: https://ssrn.com/abstract=3431636 or http://dx.doi.org/10.2139/ssrn.3431636

Julián Andrada Félix

University of Las Palmas de Gran Canaria - Faculty of Economic Science ( email )

E-35017 Las Palmas
Spain
+34 928 45 59 89 (Phone)
+34 928 45 18 29 (Fax)

Adrian Fernandez-Perez

Auckland University of Technology ( email )

AUT City Campus
Private Bag 92006
Auckland, 1142
New Zealand
+64 9 921 9999 (Phone)
+64 9 921 9940 (Fax)

Simon Sosvilla-Rivero (Contact Author)

UCM Institute for Economic Analysis ( email )

Carretera de Humera s/n
Madrid, Madrid 28223
Spain
+34913932626 (Phone)

HOME PAGE: http://www.ucm.es/info/ecocuan/ssr/

Register to save articles to
your library

Register

Paper statistics

Downloads
11
Abstract Views
104
PlumX Metrics