Uncovering Systematic Risk in Crypto currency Markets: An Empirical Investigation Using DCC-GARCH Model.

Abstract

This study presents an analysis of the occurrence of structural flaws
and spillovers of volatility among eight popular digital currencies, such as Bit
coin (BTC), Litecoin (LTC), Ripple (XRP), BNBPrice, DOGECOINPrice,
ETHEREUMPrice, TETHERPrice, and USDCOINPrice. The analysis covers the
period from December 25, 2019, to August 25, 2022, utilizing various statistical
tests such as the Chow Breakpoint Test, Cumulative Sum test, The Granger
Causality Test, the LM test for ARCH, and Dynamic Conditional Correlation
(DCC) GARCH model. The results of this research reveal being present structural
breaks in all the evaluated cryptocurrencies, highlighting the unpredictable
nature of the cryptocurrency market. Additionally, these cryptocurrencies
exhibit notable volatility spillovers and substantial positive correlations, which
point to limited benefits of diversification within the cryptocurrency market.
(Chowdhury, 2020; Treiblmaier, 2018; Quispe, 2023). These results have
implications for investors, policymakers, and other stakeholders in the
cryptocurrency market. The study recommends including cryptocurrencies as
an important component in investment portfolios to stimulate returns and
reduce overall portfolio risks, it is noted that direct investment in
cryptocurrencies can generate higher abnormal returns, but this comes with
increased risk due to their inherent volatility. Investor preference for firms
involved in cryptocurrency is influenced by factors such as legal protection and
familiarity. Thus, policymakers should prioritize financial stability and
implement careful regulation of cryptocurrency-related announcements to
prevent artificial premiums and fraudulent activities (Chowdhury, 2020;
Treiblmaier, 2018; Quispe, 2023). Furthermore, the analysis highlights the
presence of high volatility spillover effects among certain cryptocurrencies,
particularly Bitcoin, Ethereum, and Litecoin.. While volatility offers
diversification advantages, concerns arise due to the lack of intrinsic value and
dividends in cryptocurrencies (Özdemir, 2022). The presence of systematic
structural breaks suggests the possibility of manipulative behaviors and
potential trading strategies that warrant further investigation. The DCC GARCH
analysis reveals a high correlation and significant volatility spillover effects
among most cryptocurrencies. These findings emphasize the need for a more
diversified cryptocurrency market to mitigate risk and promote stability within
this emerging financial sector.