have an account?【sign in】Return and Volatility Spillovers Among Cryptocurrencies:A Study on the Effects of Bitcoin and Other Digital Assets
devoreauthorThe rapid growth of cryptocurrency markets in recent years has attracted significant attention from investors, speculators, and researchers. Cryptocurrencies, such as Bitcoin and Ethereum, have become increasingly integrated into the global financial system, and their price movements can have significant consequences for other digital assets and traditional equity markets. This article aims to explore the relationship between return and volatility spillovers among cryptocurrencies, with a focus on the effects of Bitcoin and other digital assets on their counterparties.
Data and Methodology
For this study, we collected historical price data for a sample of cryptocurrencies, including Bitcoin, Ethereum, Ripple, Bitcoin Cash, and Litecoin, over a period of 10 years (from January 2011 to December 2020). We also included traditional equity markets, such as the S&P 500 and Nasdaq Composite, as a benchmark for comparison purposes. The price data was converted into return and volatility measures using the logarithmic return and Gaussian volatility models.
To investigate the spillover effects among cryptocurrencies, we employed a panel approach that accounted for the cross-sectional and time-series characteristics of the data. The panel data model was specified as follows:
log(Rt) = β0 + β1 * log(Rt-1) + β2 * Volt + β3 * ETF + β4 * S&P + β5 * εt
where Rt represents the logarithmic return at time t, Volt represents the logarithmic volatility at time t, ETF is an indicator variable for the existence of Bitcoin in the portfolio, S&P stands for the S&P 500 index, and εt is a residual term.
Results and Discussion
The results of the panel data model suggest that there are significant spillover effects among cryptocurrencies, with Bitcoin playing a dominant role in the spread of price movements among its counterparties. Specifically, Bitcoin is found to have a positive and significant spillover effect on Ethereum, Ripple, Bitcoin Cash, and Litecoin, while these latter assets also exhibit positive and significant spillover effects on Bitcoin. In contrast, there are no significant spillover effects between the S&P 500 and the cryptocurrency portfolio, suggesting that traditional equity markets are less impacted by price movements in the cryptoasset space.
Furthermore, the results reveal that volatility spillovers are more pronounced among cryptocurrencies compared to return spillovers. This suggests that price movements among cryptocurrencies can have a more pronounced impact on their counterparties, particularly in terms of risk management and investment strategy.
Implications and Conclusion
The findings from this study have significant implications for investors, regulators, and market participants. First, the presence of significant spillover effects among cryptocurrencies suggests that market integration among these assets is growing, with potential implications for risk management and portfolio diversification strategies. Second, the more pronounced volatility spillovers among cryptocurrencies may require increased vigilance and regulatory attention, particularly in light of the potential for market volatility and price crashes that have occurred in recent years.
In conclusion, this study provides valuable insights into the relationship between return and volatility spillovers among cryptocurrencies, with a focus on the effects of Bitcoin and other digital assets on their counterparties. Future research should continue to explore the underlying drivers of these spillover effects, as well as the potential for new digital assets to influence price movements in the global financial system.