The dynamic relationship between bitcoin and the foreign exchange market: A nonlinear approach to test causality between bitcoin and currencies

Rafael Baptista Palazzi, Gerson de Souza Raimundo Júnior and Marcelo Cabus Klotzle

Finance Research Letters, 2021, vol. 42, issue C

Abstract: This paper investigates whether bitcoin has a nonlinear relationship with six currencies: euro, pound sterling, Swiss franc, renminbi, yen, and ruble, each denominated in US dollars. It employs the nonparametric causality test proposed by Diks and Panchenko (2006) and applies a multivariate filtering approach using BEKK-GARCH residuals to control the conditional heteroskedasticity on daily log-returns from July 2010 to April 2020. We also split the bitcoin dataset into two samples, one before and one after a structural break. Results reveal a direct impact of the euro on bitcoin. However, in the post-break sample, there is only an effect from renminbi to bitcoin. Findings shed light on the nonlinear relationship dynamics among currencies and whether fiat currencies can help predict bitcoin's behavior.

Keywords: Bitcoin; Exchange rate; Nonlinear causality; BEKK-GARCH filtering (search for similar items in EconPapers)
JEL-codes: C14 F31 G15 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:42:y:2021:i:c:s1544612320317074

DOI: 10.1016/j.frl.2020.101893

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