Modelling Asymmetric Volatility in the Crypto Currency and its Dynamic Relationship with Stock Market

Neenu C, T Mohamed Nishad and K. Muhammed Noufal

The Review of Finance and Banking, 2024, vol. 16, issue 1, 7-19

Abstract: The paper investigates the asymmetric volatility effect of five major cryptocurrencies and their bilateral linkages with major indices in the Indian stock market. To investigate the bilateral relationship of crypto currency with stock indices, researchers used two major stock indices in the Indian stock market namely, BSE Sensex and NSE Nifty. The study used GARCH, EGARCH and TGARCH models, asymmetric to model the asymmetric volatility effect in the conditional volatility of crypto currencies and stock indices. Johansen’s cointegration and Vector Error Correction Model is used for examining the presence of cointegration between selected variables and to analyse the strength of causality among them. The study finds the evidence of cointegration between cryptocurrencies and stock market indices, implying that cryptocurrencies are related to stock indices. Further there is unidirectional relationship among stock and crypto market and crypto currencies having short-lived response to shocks in stock markets. Even with these currencies' explosive growth, there are still not many research examining their connection to stock markets. This study will help investor’s those who making investment in currency market or in the stock market to evaluate the pattern of volatility, interconnection among them, so that they can make crucial investment decisions and diversification strategies. This will help them to gain knowledge about how these two markets move together so they may avoid underestimating risk when building portfolios that contain both kinds of assets.

Date: 2024
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