Long- and Short-Term Cryptocurrency Volatility Components: A GARCH-MIDAS Analysis

Christian Conrad, Anessa Custovic and Eric Ghysels
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Anessa Custovic: Department of Economics, University of North Carolina, Chapel Hill, NC 27599, USA
Eric Ghysels: Department of Economics, University of North Carolina, Chapel Hill, NC 27599, USA

JRFM, 2018, vol. 11, issue 2, 1-12

Abstract: We use the GARCH-MIDAS model to extract the long- and short-term volatility components of cryptocurrencies. As potential drivers of Bitcoin volatility, we consider measures of volatility and risk in the US stock market as well as a measure of global economic activity. We find that S&P 500 realized volatility has a negative and highly significant effect on long-term Bitcoin volatility. The finding is atypical for volatility co-movements across financial markets. Moreover, we find that the S&P 500 volatility risk premium has a significantly positive effect on long-term Bitcoin volatility. Finally, we find a strong positive association between the Baltic dry index and long-term Bitcoin volatility. This result shows that Bitcoin volatility is closely linked to global economic activity. Overall, our findings can be used to construct improved forecasts of long-term Bitcoin volatility.

Keywords: Baltic dry index; Bitcoin volatility; digital currency; GARCH-MIDAS; pro-cyclical volatility; volume (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (96)

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