Giver and the Receiver: Understanding Spillover Effects and Predictive Power in Cross-Market Bitcoin Prices
43 Pages Posted: 5 Mar 2020
Date Written: March 13, 2019
We identify and characterise the 'givers and the receivers' of volatility in cross-market Bitcoin prices and discuss international diversification strategies in this context. Using both time and frequency domain mechanisms, we provide estimates of outward and inward spillover effects. These have implications for (weak-form) cross-market inefficiency. In our setting, we treat high-degree of spillover as an indicator of weak-form inefficiency because investors can utilise information on the dynamic spillover effects to produce a best long-run prediction of the market. Our results show that Bitcoin prices depict strong (dynamic) spillover in volatility, especially during episodes of high uncertainty. The Bitcoin-USD exchange rate possesses net predictive power, mirrored by the tendency of the Bitcoin-EURO market as a net receiver relative to other markets. Robustness exercise generally supports our claim. The overall implication is that during episodes of high uncertainty, Bitcoin markets depict greater dynamic inefficiency, instrumenting the role of asymmetric information in the path-dependence and predictive power of Bitcoin prices in an interdependent market.
Keywords: Cross-market Bitcoin prices; Return and volatility spillovers; Uncertainty; Inefficiency; Prediction
JEL Classification: C1; E4; D5
Suggested Citation: Suggested Citation