Volatility modeling in cryptocurrency markets: effects over returns

• Autor(a) principal: Almeida, Gonçalo Pereira de
• Data de Publicação: 2021
• Tipo de documento: Dissertação
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10773/33751
• topic: Cryptocurrencies; Generalized autoregressive conditional heteroskedasticity (GARCH) model; Returns; Volatility

The proposed work aims to study the influence of Bitcoin's volatility on the return of a set of currencies, defined by Ethereum (ETH), Cardano (ADA), Binance coin (BNB), and Ripple (XRP). To achieve the desired results, a univariate GARCH model was conducted in the first stage and a multivariate GARCH model in the second stage. These models were based on the daily prices of the five currencies, collected from Yahoo Finance, for a period between October 2017 and August 2021. The results obtained from the first model led to the conclusion that, especially in Bitcoin, past returns are not a good indicator of present and future returns. In the second model, it was tested whether the volatilities of this set of coins impacted, and if so, how, their returns were affected. From this model, it can be concluded that all currencies thrive on their volatility and that volatility in the other currencies presents a negative effect on their returns. In short, since this is a very volatile market, this volatility turns out to be positive for returns. Assuming this assumption, there is a great opportunity for day-to-day trading, and investors can watch for market dips and capitalize on the expected upside.