Volatility Spillovers Across CBDC Attention and Stock Market Volatility

Abstract

The rapid digitisation of the world made it clear that traditional money needs to be replaced with alternatives, otherwise we risk missing out on the future. Consequently, central banks around the world are examining whether and how they can introduce Central Bank Digital Currency. CBDC has already been introduced in ten countries, and it is currently being piloted in 15 other countries around the world. Considering this trend, CBDC will increasingly have an impact on financial markets in the future.

This study aims to determine the volatility interconnectedness between the Central Bank Digital Currency Attention Index (CBDCAI) and the stock market. An analysis revealed strong correlation between CBDCAI and equity markets. Also, the research showed that CBDCAI is usually a volatility receiver, rather than its transmitter. The first chapter of this work explores a brief explanation of CBDC, its usefulness, challenges, and a motivation behind its investigation. The second chapter analyses the existing literature on CBDC. The third section of the research explains the rationale behind the data selection. The fourth chapter provides an insight into the research methodology and the last chapter discusses the empirical results of the study. Lastly, the work summarises all obtained results and outlines directions for future research and practical implications in this field.

Keywords: Central Bank Digital Currency, CBDC, Volatility Spillovers, Stock Markets, TVP-VAR