Volatility Spillover from Bitcoin Market to the U.S Financial Markets and Foreign Exchange Pairs of Major Trading Currencies

Abstract

This study examines the dynamics of volatility spillovers from Bitcoin market to U.S. financial markets and foreign exchange pairs of major trading currencies. The present study is based on two objectives. For the first objective, the sample consists of U.S. financial and Bitcoin markets. For the second objective, the sample consists of Bitcoin markets and foreign exchanges pairs denominated in six major trading currencies. Spillover index, spillover asymmetry measure and spillover frequency connectedness methodologies have been employed for the analyses. The methodologies applied reveal insight into the dynamics of average volatility spillover, directional volatility spillovers, pairwise volatility spillovers, asymmetric volatility spillovers and volatility spillover connectedness both at short and long frequencies from the Bitcoin markets to U.S. financial markets and foreign exchange pairs of major trading currencies. The findings of the study allude towards the presence of low-level of integration, asymmetric volatility spillover and dominant role of short horizon spillovers among the U.S. Bitcoin and financial markets. The findings also reveal the presence of low-level of integration, asymmetric volatility spillovers and dominant role of short horizon spillovers among the Bitcoin markets and foreign exchange pairs denominated in six major trading currencies. Bitcoin market is found to provide significant portfolio diversification benefits for the U.S. financial markets. Alternative currency Bitcoin trading in Euro is found to provide the most portfolio diversification benefits for foreign exchange portfolios consisting of major trading currencies. The findings of the study regarding spillover dynamics and portfolio diversification capabilities of Bitcoin market for U.S. financial markets and foreign exchange markets of major trading currencies provide significant implications for portfolio diversification and risk management. The findings also entail significant portfolio diversification recommendations both for investors in the U.S. and global markets. Significant room exist for further analysis on the dynamic relationship and xi connectedness among various cryptocurrencies, conventional and alternative investment assets in financial markets.