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Economic fundamentals or investor perceptions? The role of uncertainty in predicting long-term cryptocurrency volatility

Tong Fang, Zhi Su and Libo Yin ()

International Review of Financial Analysis, 2020, vol. 71, issue C

Abstract: This paper investigates the impacts of News-based Implied Volatility (NVIX) on the long-term volatility of five cryptocurrencies using the GARCH-MIDAS model. We also evaluate the hedging effectiveness of cryptocurrencies against the S&P 500 index after incorporating NVIX. The empirical results show that NVIX has a negative and significant impact on the long-term volatility of five cryptocurrencies. The impact of NVIX remains robust even after controlling for Global Economic Policy Uncertainty (GEPU) and Realized Volatility (RV). The uncertainty derived from investor perception is more important than the uncertainty of economic fundamentals in predicting cryptocurrency volatility. The hedging effectiveness of Bitcoin against the S&P 500 index is improved due to consideration of NVIX. This paper provides new evidence concerning the impacts of uncertainty on the volatility of cryptocurrencies.

Keywords: Cryptocurrency; Uncertainty; GARCH-MIDAS model; Hedging effectiveness (search for similar items in EconPapers)
JEL-codes: F37 G15 C53 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.irfa.2020.101566

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