Volatility Spillover Between Bitcoin And Financial Stress Index

Abstract

Purpose: This paper aims to test the volatility models for Bitcoin (BTC) and the financial stress index (FSI) and examine the volatility spillover among them. This aim was reached by obtaining weekly data from the 7th of January 2011 and the 24th of December 2021. Methodology: First, volatility modelling for the series is provided, and GARCH (1,1) for the BTC series and IGARC (1,2) for the FSI series are determined as the most appropriate volatility models. Then, residual volatility series are created for each variable over the IGARCH (1,2) and GARCH (1,1) models for the volatility spread between the series. The volatility spread between the series is examined with the diagonal VECH GARCH method. It is concluded that there is a positive volatility spillover effect from the FSI variable to the BTC variable. Then, impulse-response analysis is performed on the volatility residual series created for each variable. The empirical findings from impulse response analysis support a risk transfer between BTC and FSI series. Results and Findings: Changes in the BTC return series and FSI series are caused mainly by themselves, and the series are most affected by their shocks. By comparing the variance decomposition of the volatility series with the analysis results, it can be said that the changes in the volatility series are caused mainly by each other.