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 incryptocurrencies 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 offersdiversification 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.