Volatility spill over effect of cryptocurrency prices and foreign exchange in Nigeria

Abstract

The study analyzes the volatility spillover effects of cryptocurrencies and foreign exchange market in Nigeria, covering a two-year period from September 19th, 2019, to September 19th, 2021. It captures a period where the domestic and foreign economy experienced a series of challenges, reflecting on its financial markets and cryptocurrency. The study adopts the Vector Autoregressive - Multivariate Generalized Conditional Heteroskedastic methodological framework, with the Baba, Engle, Kraft, and Kroner transformation (VAR-MGARCH-BEKK), to determine the volatility spillover effect between Nigeria’s Foreign exchange returns and the price returns of four of the largest cryptocurrencies traded in Nigeria. Findings indicate foreign exchange have positive effect on the mean spillovers on cryptocurrencies, and an overall market influence over cryptocurrencies, due to a high GARCH and low ARCH estimate. However, the ARCH parameters show that past errors of foreign exchange market are observed to be vulnerable to external volatilities. Therefore, the study is able to conclude that cryptocurrencies serve as a viable hedging, safe haven and an effective diversification instrument against financial uncertainties, and therefore, recommends optimal diversification strategies and low leverage contracts to avoid the high risks cryptocurrencies present, as they are highly volatile, hence, susceptible to speculative attacks.