The influence of central bank monetary policy announcements on cryptocurrency return volatility
-
DOIhttp://dx.doi.org/10.21511/imfi.14(4).2017.07
-
Article InfoVolume 14 2017, Issue #4, pp. 60-72
- Cited by
- 2682 Views
-
496 Downloads
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.
- Keywords
-
JEL Classification (Paper profile tab)C32, C58, G15
-
References40
-
Tables4
-
Figures6
-
- 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
-
- Anzuini, A., Lombardi, M. J., Pagano, P. (2013). The impact of monetary policy shocks on commodity prices. International Journal of Central Banking, 9(3), 119-144.
- Belgacem, A., & Lahini, A. (2012). More on the impact of US macroeconomic announcements: Evidence from French and German stock markets’ volatility. Economics Bulletin, 32(2), 1509-1526.
- Bernanke, B. S., & Kuttner, K. N. (2005). What explains the stock market’s reaction to Federal Reserve policy? Journal of Finance, 60, 1221-1257.
- Birz, G., & Lott Jr., R. J. (2011). The effect of macroeconomic news on stock returns: New evidence from newspaper coverage. Journal of Banking and Finance, 35, 2791-2800.
- Bollerslev, T. (1986). Generalized Autoregressive Conditional Heteroskedasticity. Journal of Econometrics, 31, 307-327.
- Bollerslev, T., Chou, R. Y., Kroner, K. F. (1992). ARCH modelling in finance: A review of the theory and empirical evidence. Journal of Econometrics, 52(1), 5-59.
- Bomfim, A. N. (2003). Pre-announcement effects, news effects, and volatility: Monetary policy and the stock market. Journal of Banking and Finance, 27, 133-151.
- Brière, M., Oosterlinck, K., & Szafarz, A. (2015). Virtual currency, tangible return: Portfolio diversification with bitcoin. Journal of Asset Management, 16(6), 365-373.
- Cheah, T. E., & Fry, J. (2014). Speculative Bubbles in Bitcoin markets? An empirical investigation into the fundamental value of Bitcoin. Economic Letters, 13, 32-36.
- Chen, Y-C, Rogoff, K. (2003). Commodity currencies. Journal of International Economics, 60(1), 133-160.
- Chu, J., Nadarajah, S., & Chan, S. (2015). Statistical Analysis of the Exchange Rate of Bitcoin. PLoS ONE, 10(7), 1-27.
- Chulia, H., Martens, M., & van Dijk, D. (2010). Asymmetric effects of federal funds target rate changes on S&P100 stock returns, volatilities and correlations. Journal of Banking and Finance, 34, 834-839.
- Cody, B. J., Mills, L. O. (1991). The role of commodity prices in formulating monetary policy. The Review of Economics and Statistics, 73(2), 358-365.
- D’Amico, S., English, W., López-Salido, D., & Nelson, E. (2012). The Federal Reserve’s Large-Scale Asset Purchase Programmes: Rationale and Effects. The Economic Journal, 122, 415-446.
- Dwyer, G. P. (2015). The economics of Bitcoin and other similar private digital currencies. Journal of Financial Stability, 17, 81-91.
- Dyhrberg, A. H. (2016). Bitcoin, gold and the dollar – A GARCH volatility analysis. Finance Research Letters, 16, 85-92.
- Égert, B., & Kocenda, E. (2013). The impact of macro news and central bank communication on emerging European forex markets. Economic Systems, 38, 73-88.
- Engle, R. F. (1982). Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation. Econometrica, 50(4), 987-1007.
- Eun, S. C., & Shim, S. (1989). International Transmission of Stock Market Movements. The Journal of Financial and Quantitative Analysis, 24(2), 241-256.
- European Central Bank (2012). Virtual currency schemes. ECB Bulletin, October, 1-55.
- Geman, H., Madan, D., & Yor, M. (2000). Asset prices are Brownian motion: only in business time, Quantitative Analysis in Financial Markets (pp. 103-146). New York: World Scientific, River Edge.
- Glick, R., & Leduc, S. (2012). Central bank announcements of asset purchases and the impact on global financial and commodity markets. Journal of International Moneyand Finance, 31, 2078-2101.
- Harwick, C. (2015). Cryptocurrency and the Problem of Intermediation. The Independent Review, 20(4), 569- 588.
- Hayek, F. A. (1977). A Free-Market Monetary System. Journal of Libertarian Studies, 3(1), 1-8.
- Hayek, F. A. (1990). Denationalization of Money – The Argument Refined (3rd ed.). Alabama: The Institute of Economic Affairs.
- Joyce, M., Lasaosa, A., Stevens, I., & Tong, M. (2010). The Financial Market Impact of Quantitative Easing (Bank of England Working Paper, No. 393).
- Karlstrom, H. (2014). Do libertarians dream of electric coins? The material embeddedness of Bitcoin. Distinktion: Scandinavian Journal of Social Theory, 15(1), 23-36.
- Kristoufek, L. (2015). What are the main drivers of the Bitcoin price? Evidence from wavelet coherence analysis. PloS one, 10(4), 1-15.
- Kroll, J. A., Davey, I. C., & Felten, E. W. (2013). June. The economics of Bitcoin mining, or Bitcoin in the presence of adversaries. In Proceedings of WEIS.
- Lo, S., & Wang, C. (2014). Bitcoin as Money. Federal Reserve Bank of Boston. Current Policy Perspectives, 14(4), 1-28.
- Lobo, B. J. (2002). Interest rate surprises and stock prices. Financial Review, 37, 73-92.
- Lobo, B. J. (2000). Asymmetric effects of interest rate changes on stock prices. The Financial Review, 35, 125-144.
- Luther, W. J. (2015). Cryptocurrencies, network effects, and switching costs. Contemporary Economic Policy, 34(3), 553-571.
- Marian, O. (2013). Are cryptocurrencies super tax havens? Michigan Law Review First Impressions, 38(1), 1-11.
- Meaning, J., & Zhu, F. (2011). The impact of recent central bank asset purchase programes. Bank of International Settlements Quarterly Review, December, 73-83.
- Mittal, S. (2012). Is Bitcoin Money? Bitcoin and Alternative Theories of Money. Bitcoin and Alternative Theories of Money, Harvard University, Law School, April 23.
- Rangel, G. (2010). Macroeconomic news, announcements, and stock market jump intensity dynamics. Journal of Banking and Finance, 35, 1263-1276.
- Swartz, D. N. (2014). Bursting the Bitcoin Bubble: The case to regulate digital currency as a security or commodity. Tulane Journal of Technology and Intellectual Property, 17(1), 319-335.
- Yelowitz, A., & Wilson, M. (2015). Characteristics of Bitcoin users: an analysis of Google search data. Applied Economics Letters, 22(13), 1030-1036.
- Yermack, D. (2013). Is Bitcoin a Real Currency? An economic appraisal (National Bureau of Economic Research Working Paper Series, No. 19747).