Empirical Analysis of Cryptocurrency Volatility

Abstract

Due to the recent rise in popularity of cryptocurrencies, understanding the differences between the individual coins as well as contextualizing where they stand in relation to traditional financial assets has become an increasingly important question. Besides Bitcoin, six other notable cryptocurrencies are studied: Ether, Ripple, Litecoin, Stellar, Dash, and Monero. This study utilizes three types of univariate GARCH models to (a) compare the volatility behavior among the cryptocurrencies and, (b) to compare the behavior to that of traditional asset classes such as currencies, commodities, and securities. Furthermore, (c) the study analyzes the co-movements of the cryptocurrency markets with a DCC Multivariate GARCH approach to determine the existence of a financial contagion effect in the cryptocurrency market. Our results suggest that (i) Ripple, Stellar, and Ether have distinct volatility behaviors compared to the others, and (ii) cryptocurrency volatility behavior is not similar to that of any traditional asset class but has similarities to securities in terms of volatility persistence and similarities to commodities in terms of news impact to volatility. Finally, (iii) there is evidence of the financial contagion effect in the cryptocurrency market.