Abstract
PurposeThis paper provides an important perspective to the predictive capacity of Fed and European Central Bank (ECB) meeting dates and production announcements for the dynamic conditional correlation (DCC) between Bitcoin and energy commodities returns and volatilities during the period from August 11, 2015 to March 31, 2018.Design/methodology/approachTo assess empirically the unanticipated component of the US and ECB monetary policy, the authors pursue the Kuttner's approach and use the federal funds futures and the ECB funds futures to assess the surprise component. The authors use the approach of DCC as introduced by Engle (2002) during the period from August 11, 2015 to March 31, 2018.FindingsThe authors’ results suggest strong significant DCCs between Bitcoin and energy commodity markets if monetary policy surprises are incorporated in variance. These results confirmed the financialization of Bitcoin and commodity energy markets. Finally, the DCC between Bitcoin and energy commodity markets appears to respond considerably more in the case of Fed surprises than ECB surprises.Originality/valueThis study is a crucial topic for policymakers and portfolio risk managers.
Highlights
The role of a central bank is not naturally and historically dedicated to creditworthiness, some economists argue that it is not possible to avoid it – see Goodhart (1999)
Econometric methodology The methodology employed in this study, which tries to measure Bitcoin and energy commodities returns and volatilities responses to monetary policy surprises announced by the Federal Reserve (Fed) and European Central Bank (ECB), is based on dynamic conditional correlation (DCC) multivariate model as recommended by Engle (2002)
According to the impact of US and European monetary policies on the correlation between Bitcoin and selected energy commodities in this study, the results reported in Table 4 reveal that 1% raise in the surprise of Federal Open Market Committee (FOMC) monetary policy reasons a decline of roughly 0.0534862% in the correlation between Bitcoin and London GAS OIL returns, and respectively, 0.0180978, 0.0154627, 0.0115703, 0.0097802 and 0.0056482 for the correlations associated with the returns of NATURAL GAS, CRUDE OIL WTI, GASOLINE RBOB, HEATING OIL and BRENT OIL
Summary
The role of a central bank is not naturally and historically dedicated to creditworthiness, some economists argue that it is not possible to avoid it – see Goodhart (1999). It is commonly known that transaction movement can be influenced by the new information (Fed and ECB monetary policy events in our paper) Giving this new info is accessible in the financial market, investors respond through portfolio variations of their portfolios further intensively among energy commodities portfolio, which in turn starts to an expansion in trading capacity. We examine in this paper the US and European monetary policy surprises as a potential determinant of the volatility of energy commodity returns is of key significant given a period of quick failure of the European markets and the principal role of US monetary policy movements on financial asset prices. 2. Econometric methodology The methodology employed in this study, which tries to measure Bitcoin and energy commodities returns and volatilities responses to monetary policy surprises announced by the Fed and ECB, is based on DCC multivariate model as recommended by Engle (2002). Where, ω , α and β represent the parameters that want to be estimated
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