INVESTIGATING VOLATILITY SPILLOVERS AND THE INFLUENCE OF THE UKRAINE WAR ON CRYPTOCURRENCY MARKETS: A DYNAMIC ANALYSIS

Abstract

This study delves into the dynamic mechanisms of financial markets, particularly focusing on volatility spillovers across six major cryptocurrencies—Bitcoin, Ethereum, Stellar, Tether, Cardano, and Litecoin—from January 1, 2019, to September 12, 2023. Employing three distinct methodologies—EGARCH, DCC-GARCH, and wavelet—the research aims to comprehensively understand whether cryptocurrency markets have been subjected to extreme volatility and the potential influence of the Ukraine war on cryptocurrency volatility. The utilization of GARCH family models allows for the examination of asset returns across various time scales, while wavelet analysis captures information across different frequencies without disregarding temporal elements. Our findings reveal that three prominent cryptocurrency markets, namely Bitcoin, Ethereum, and Litecoin, exhibit high volatility levels and mutual dependence throughout the sample period. This suggests that any perturbation in one market prompts investors to react correspondingly in other markets, thereby indirectly triggering volatility spillovers. Furthermore, we investigate the impact of attention directed towards the Russia-Ukraine War on cryptocurrencies. Utilizing EGARCH, DCC-GARCH, and wavelet analyses, we observe that the co-movement between War attention and cryptocurrencies varies depending on the investment horizon and the prevailing market conditions. In the short term, War attention negatively (positively) influences all cryptocurrencies, whereas its effects manifest more intricately over mid-term and long-term horizons. Our results consistently indicate that War attention significantly impacts cryptocurrencies, with shorter-term cryptocurrency investors exhibiting a tendency to seek liquidity in response. Overall, this study provides valuable insights into the dynamics of cryptocurrency markets, shedding light on the interplay between geopolitical events, investor attention, and market volatility.