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Understanding cryptocurrency volatility: The role of oil market shocks

Libo Yin (), Jing Nie and Liyan Han

International Review of Economics & Finance, 2021, vol. 72, issue C, 233-253

Abstract: This study employs the generalized autoregressive conditional heteroscedasticity-mixed data sample framework to examine the role of oil market shocks in determining the long-term volatility of cryptocurrencies. We analyzed three cryptocurrencies, namely, Bitcoin, Ethereum, and XRP, and six oil market shocks, namely, oil price return (OR), oil realized volatility (ORV), oil realized skewness (ORSV), oil supply shocks (OSS), and oil demand shocks [global aggregate demand for industrial commodities (OADS) and crude oil market demand shocks (OSDS)]. The empirical results of the study reveal that OR, ORV, ORSV, and the two types of oil demand shocks (OADS and OSDS) and OSS have negative and positive impacts, respectively, on the long-term volatility of cryptocurrencies. We further gained insights on the economic underpinnings and observed that the ability of the oil market shocks to signal the uncertainty of the macroeconomic environment is clearly the most important source of its negative and significant impact on the volatility of cryptocurrencies. Moreover, an adverse oil market shock increases the attractiveness of cryptocurrencies, as they could provide shelter from sovereign risk and weakness. Overall, our study highlights a clear and comprehensive understanding of the association between the oil market risk and the cryptocurrency volatility dynamic and the possibility for cryptocurrencies to act as a hedge under specific uncertain economic conditions.

Keywords: Oil market shocks; Cryptocurrency volatility; Macroeconomic uncertainty; Safe haven (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.iref.2020.11.013

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