Economic Policy Uncertainty and the Bitcoin market

Abstract

This paper investigates the prediction power of Economic Policy Uncertainty on three aspects of Bitcoin, particularly the return, volume, and volatility. We employed the Transfer Entropy model with two different regimes: (i) stationary and (ii) non-stationary assumption. We constructed different algorithm calculations for returns, volume, and volatility to test how this proxy impacts. We find that the Global Economic Policy Uncertain negatively causes Bitcoin volumes and volatilities. Therefore, under uncertain regimes, investors are risk-averse to trade, which makes the market less volatile. Our findings confirm the existence of pessimistic risk premium and the theory of deteriorating liquidity under uncertainties in the Bitcoin market.

Keywords: Economic Policy Uncertainty (EPU), Bitcoin, return, volume, volatility

JEL Classification: G15, C32, D81, G10