The influence of central bank monetary policy announcements on cryptocurrency return volatility

  • Released On
    Friday, 15 December 2017
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  • DOI
    http://dx.doi.org/10.21511/imfi.14(4).2017.07
  • Article Info
    Volume 14 2017, Issue #4, pp. 60-72
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This work is licensed under a Creative Commons Attribution 4.0 International License

The emergence of Bitcoin in 2009 has received considerable attention surrounding the validity of cryptocurrencies as a viable and, in some jurisdictions, a legal currency alternative. Despite widespread concern that these cryptocurrencies are fostering the environment within which a substantial bubble can occur, it is important to analyze whether these new assets are behaving similarly to major international currencies. This paper investigates the effects of international monetary policy changes on bitcoin returns using a GARCH (1.1) estimation model. The results indicate that monetary policy decisions based on interest rates taken by the Federal Open Market Committee in the United States significantly impact upon bitcoin returns. After controlling for international effects, we find significant evidence of volatility effects driven by United States, European Union, United Kingdom and Japanese quantitative easing announcements. These results show that, despite its nature and ideals, bitcoin seems to be subject to the same economic factors as traditional fiat currencies, and is not entirely unaffected by government policies. This result has implications for investors using bitcoin as a hedging or diversification tool. In addition, we contribute to the existing debate regarding the classification of bitcoin as an asset class, by illustrating that bitcoin volatility exhibits various reactions that bear resemblance to both currency pairs and store-of-value assets.

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    • Figure 1. Percentage of total bitcoin trading from August 2012 to August 2017
    • Figure 2. Bitcoin daily price returns and volatility from 2011 to 2016
    • Figure 3a. Central bank monetary policy actions and domestic stock market volatility (2010–2016), the United States
    • Figure 3b. Central bank monetary policy actions and domestic stock market volatility (2010–2016), Europe
    • Figure 3c. Central bank monetary policy actions and domestic stock market volatility (2010–2016), United Kingdom
    • Figure 3d. Central bank monetary policy actions and domestic stock market volatility (2010–2016), Japan
    • Table 1. Descriptive statistics: asset returns
    • Table 2. Number of central bank monetary policy actions post policy board meetings
    • Table 3. GARCH (1.1) results for interest rates adjustment effects on bitcoin daily returns
    • Table 4. GARCH (1.1) results for Quantitative Easing (QE) adjustment effects on bitcoin daily returns