The risks of trading on cryptocurrencies: A regime-switching approach based on volatility jumps and co-jumping behaviours

【Author】 Li, Leon

【Source】APPLIED ECONOMICS

【影响因子】1.916

【Abstract】Previous research has shown volatility jumps and co-jumping behaviours in cryptocurrency markets. Motivated by these findings, we employ the herding effect and financial contagion channel to outline a theoretical framework of volatility-state-dependent correlations in cryptocurrency markets. We show that digital currency markets are more strongly correlated when experiencing an identical volatility regime, which echoes co-jumping behaviours addressed by the literature. Moreover, the strong correlation that occurs when the paired cryptocurrencies simultaneously experience a high volatility regime results in the least effectiveness of diversification in terms of a minimum portfolio risk reduction. Last but not least, the proposed state-dependent approach in this study proves effective at the task of risk forecasting and risk reduction for cryptocurrency portfolios, beyond the bivariate GARCH-based models, which are a pure and simple time-dependent approach.

【Keywords】Cryptocurrencies; volatility jumps; co-jumping behaviours; herding effect; financial contagion channel

【发表时间】

【收录时间】2023-03-06

【文献类型】理论模型

【主题类别】

区块链治理-市场治理-数字货币