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Unveiling the Influencing Factors of Cryptocurrency Return Volatility

Author

Listed:
  • Andromahi Kufo

    (Faculty of Business and Economics, Department of Economics and Finance, Main Building, University of New York Tirana, Tirana 1001, Albania)

  • Ardit Gjeci

    (Faculty of Business and Economics, Department of Economics and Finance, Main Building, University of New York Tirana, Tirana 1001, Albania)

  • Artemisa Pilkati

    (Grant Thornton, Tirana 1001, Albania)

Abstract

The blossoming of cryptocurrencies during the last decade has largely influenced both the financial and the technological world. Bitcoin emerged on the edge of the financial crisis in 2008, signaling the very beginning of a financial and technological innovation, which in continuance would eventually create a lot of questions and debate previously unforeseeable. This paper aims to explore the impact of factors such as trading volume, information demand, stock returns, and exchange rates on the volatility of returns for decentralized and unbacked cryptocurrencies from 2016 to 2022 by employing the GARCH model. Based on each coin’s innate functional characteristics and market performance quantified by their respective market capitalization, the selection included Bitcoin, Ether, and XRP as representative crypto coins for the category of decentralized and unbacked cryptocurrencies. The implementation of correlation analysis and the use of the GARCH model on influencing factors for each coin revealed that decentralized and unbacked cryptocurrencies are positively related to trading volume, information demand, and exchange rates while being indifferent to a certain extent to the stock market returns of the world stock index MSCI ACWI. The results of this study provide further insight into the behavior of cryptocurrency return volatility in the new, ever-changing, and highly unpredictable crypto market as well as aid investors in their decision-making process concerning portfolio optimization.

Suggested Citation

  • Andromahi Kufo & Ardit Gjeci & Artemisa Pilkati, 2023. "Unveiling the Influencing Factors of Cryptocurrency Return Volatility," JRFM, MDPI, vol. 17(1), pages 1-22, December.
    • Handle: RePEc:gam:jjrfmx:v:17:y:2023:i:1:p:12-:d:1307467
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    References listed on IDEAS

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    2. Kavya Clanganthuruthil Sajeev & Mohd Afjal, 2022. "Contagion effect of cryptocurrency on the securities market: a study of Bitcoin volatility using diagonal BEKK and DCC GARCH models," SN Business & Economics, Springer, vol. 2(6), pages 1-21, June.
    3. Goodell, John W. & Goutte, Stephane, 2021. "Co-movement of COVID-19 and Bitcoin: Evidence from wavelet coherence analysis," Finance Research Letters, Elsevier, vol. 38(C).
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