Bitcoin and Its Offspring: A Volatility Risk Approach

  • Bazán-Palomino W
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Abstract

I examine the risk-return relationship between the return on Bitcoin and the returns on its forks (Litecoin, Bitcoin Cash, Bitcoin Gold, Bitcoin Diamond, and Bitcoin Private). Forks often create price volatility and instability, and I provide evidence that there is a transmission of volatility risk from Bitcoin forks to Bitcoin. The three multivariate volatility models (EWMA, DCC, and BEKK) provide a better estimation of the conditional volatility and the time-varying correlation of Bitcoin with its forks than univariate volatility models. In particular, the time-varying correlation is negative during times of high volatility, but strong and positive in low volatility episodes. Therefore, Bitcoin and its forks behave as crypto-currencies during bad times and as assets during good times. The strong and positive correlation for most of the sample period indicates that Bitcoin forks do not offer a hedge against Bitcoin risk. JEL Classification: C22, C5, F3, G15

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Bazán-Palomino, W. (2020). Bitcoin and Its Offspring: A Volatility Risk Approach. In Advanced Studies of Financial Technologies and Cryptocurrency Markets (pp. 233–256). Springer Singapore. https://doi.org/10.1007/978-981-15-4498-9_13

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