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The effect of policy uncertainty on the volatility of bitcoin

Author

Listed:
  • Manel Mahjoubi
  • Jamel Eddine Henchiri

Abstract

Purpose - This paper aims to investigate the effect of the economic policy uncertainty (EPU), geopolitical risk (GPR) and climate policy uncertainty (CPU) of USA on Bitcoin volatility from August 2010 to August 2022. Design/methodology/approach - In this paper, the authors have adopted the empirical strategy of Yen and Cheng (2021), who modified volatility model of Wang and Yen (2019), and the authors use an OLS regression with Newey-West error term. Findings - The results using OLS regression with Newey–West error term suggest that the cryptocurrency market could have hedge or safe-haven properties against EPU and geopolitical uncertainty. While the authors find that the CPU has a negative impact on the volatility of the bitcoin market. Hence, the authors expect climate and environmental changes, as well as indiscriminate energy consumption, to play a more important role in increasing Bitcoin price volatility, in the future. Originality/value - This study has two implications. First, to the best of the authors’ knowledge, the study is the first to extend the discussion on the effect of dimensions of uncertainty on the volatility of Bitcoin. Second, in contrast to previous studies, this study can be considered as the first to examine the role of climate change in predicting the volatility of bitcoin. This paper contributes to the literature on volatility forecasting of cryptocurrency in two ways. First, the authors discuss volatility forecasting of Bitcoin using the effects of three dimensions of uncertainty of USA (EPU, GPR and CPU). Second, based on the empirical results, the authors show that cryptocurrency can be a good hedging tool against EPU and GPR risk. But the cryptocurrency cannot be a hedging tool against CPU risk, especially with the high risks and climatic changes that threaten the environment.

Suggested Citation

  • Manel Mahjoubi & Jamel Eddine Henchiri, 2024. "The effect of policy uncertainty on the volatility of bitcoin," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 16(4), pages 429-441, May.
  • Handle: RePEc:eme:jfeppp:jfep-08-2023-0222
    DOI: 10.1108/JFEP-08-2023-0222
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    More about this item

    Keywords

    Volatility; Economic policy uncertainty; Geopolitical risk; Climate policy uncertainty; Cryptocurrency markets; C33; C50; F42;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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