Introduction
The cryptocurrency market has emerged as a dynamic force in global finance, exhibiting unique relationships with traditional assets like fiat currencies and commodities. This study employs advanced econometric models—GARCH-M-ARMA and EGARCH-M-ARMA—to analyze:
- Spillover effects between cryptocurrencies (Bitcoin, Litecoin) and major currency indices (USD, EUR, JPY, RMB).
- Volatility clustering and leverage effects in price movements.
- Bidirectional influences, particularly the negative spillover between Bitcoin and the US Dollar Index.
Key Findings
Spillover Effects:
- Significant return spillovers from USD, EUR, RMB, and JPY indices to Bitcoin and Litecoin.
- Volatility in fiat currencies predicts subsequent volatility in cryptocurrencies (persistent volatility transmission).
Leverage Effects:
- Both cryptocurrencies and fiat currencies exhibit asymmetric volatility: Negative price shocks amplify future volatility more than positive shocks.
Negative Bidirectional Spillover:
- Bitcoin and the USD Index demonstrate a two-way negative relationship, suggesting inverse price movements under market stress.
Methodology
Models Used
- GARCH-M-ARMA: Captures volatility clustering and risk-return tradeoffs.
- EGARCH-M-ARMA: Identifies leverage effects (asymmetric responses to price changes).
Data Sources
- Cryptocurrencies: Bitcoin (BTC), Litecoin (LTC).
- Fiat Indices: USD (DXY), EUR, JPY, Offshore RMB.
- Commodity: Gold prices.
Implications for Investors
👉 How to hedge against cryptocurrency volatility
- Diversify portfolios with assets showing low spillover correlations (e.g., gold).
- Monitor currency index trends to anticipate crypto volatility.
FAQs
Q: What causes spillover effects between cryptocurrencies and fiat currencies?
A: Interconnected markets and shared macroeconomic drivers (e.g., interest rates, inflation).
Q: How does leverage effect impact trading strategies?
A: Traders may adjust position sizes during downturns to account for heightened volatility.
Q: Why is the Bitcoin-USD relationship negative?
A: Bitcoin often acts as a "risk-off" asset when the USD strengthens due to liquidity flows.
Conclusion
This analysis confirms that cryptocurrencies and fiat currencies are deeply interlinked through spillovers and leverage effects. For strategic insights:
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