University of Bath PHD Essays on efficiency, hedging effectiveness, and volatility dynamics in cryptocurrency markets Wang, Zehong Award date: 2018 Awarding institution: University of Bath Link to publication Alternative formats If you require this document in an alternative format, please contact: [email protected] General rights Copyright and moral rights for the publications made accessible in the public portal are retained by the authors and/or other copyright owners and it is a condition of accessing publications that users recognise and abide by the legal requirements associated with these rights. • Users may download and print one copy of any publication from the public portal for the purpose of private study or research. • You may not further distribute the material or use it for any profit-making activity or commercial gain • You may freely distribute the URL identifying the publication in the public portal ? Take down policy If you believe that this document breaches copyright please contact us providing details, and we will remove access to the work immediately and investigate your claim. Download date: 06. Oct. 2021 Essays on efficiency, hedging effectiveness, and volatility dynamics in cryptocurrency markets Zehong Wang A thesis submitted for the degree of Doctor of Philosophy University of Bath Department of Economics May 2018 COPYRIGHT Attention is drawn to the fact that copyright of this thesis/portfolio rests with the author and copyright of any previously published materials included may rest with third parties. A copy of this thesis/portfolio has been supplied on condition that anyone who consults it understands that they must not copy it or use material from it except as licenced, permitted by law or with the consent of the author or other copyright owners, as applicable. Signed on behalf of the Faculty of Humanities & Social Sciences 1 Abstract This thesis contains four chapters. The first chapter introduces the background of the Bitcoin platform. The second chapter examines whether Bitcoin market is efficient by considering intra-day open, high, low and close prices. The third chapter examines the dynamic relationship between Bitcoin and Litecoin in both short run and long run by employing VARX- MGARCH-Mean model. The spillover effects are significant in both direction. For the examined time period, the covariance between Bitcoin return and the Litecoin return is not stable in the long run. The last chapter examines the hedging capability of Bitcoin and Litecoin as a cryptocurrency portfolio. Results suggest Bitcoin and Litecoin have hedging capability against some financial assets. 2 Table of Contents 1.1. Introduction .......................................................................................................... 7 1.1.1. First cryptocurrency ................................................................................................. 7 1.1.2. Medium of exchange ................................................................................................ 8 1.1.3. Store of value and unit of account ............................................................................ 8 1.1.4. Evolution of cryptocurrencies ................................................................................... 9 1.1.5. Historic events ....................................................................................................... 10 1.2. Bitcoin ................................................................................................................. 12 1.2.1. Network ................................................................................................................ 12 1.2.2. Digital currency ...................................................................................................... 16 1.2.3. Open source .......................................................................................................... 16 1.2.4. Protocol ................................................................................................................. 16 1.2.5. Technology ................................................................................................................ 17 1.2.5.1. Transaction .................................................................................................................. 17 1.2.5.2. Blockchain ................................................................................................................... 19 1.2.5.3. Mining ......................................................................................................................... 20 1.2.5.4. Timestamp .................................................................................................................. 21 1.2.5.5. Wallet .......................................................................................................................... 21 1.2.5.6. Regulation ................................................................................................................... 22 1.2.5.7. Liquidity of trading platforms ..................................................................................... 22 1.3. Similar Platforms ................................................................................................. 24 1.3.1. Credit card ............................................................................................................. 25 1.3.2. Paypal ................................................................................................................... 26 1.3.3. Private digital currency ........................................................................................... 27 2.1. Introduction ............................................................................................................. 29 2.2. Literature review ................................................................................................. 32 2.2.1. MARKET EFFICIENCY .............................................................................................. 32 2.2.2. Historical volatility ................................................................................................. 37 2.3. Research questions .............................................................................................. 39 2.4. Methodology ...................................................................................................... 41 2.4.1. Return predictability .............................................................................................. 41 2.4.2. Measures of historical volatility .............................................................................. 42 2.4.3. ARCH and GARCH ................................................................................................... 45 2.4.4. Range-based GARCH .............................................................................................. 47 2.4.5. Arbitrage opportunity ............................................................................................ 48 2.5. Data .................................................................................................................... 48 2.5.1. Basic description .................................................................................................... 48 2.5.2. Unit root test ......................................................................................................... 56 2.5.4. Historical volatility estimator .................................................................................. 60 2.6. Results and discussion ......................................................................................... 61 2.6.1. Return predictability in Bitstamp ............................................................................ 61 2.6.1.1. AR(1)-GARCH and AR(1)-Range-GARCH models ......................................................... 61 2.6.1.2. AR model with exogenous variables ........................................................................... 64 2.6.1.3. Granger causality test ................................................................................................. 65 2.6.2. Arbitrage opportunities across exchanges ............................................................... 66 2.6.2.1. Linear regression with GARCH(1,1) ............................................................................. 69 3 2.6.2.2. Linear regression with EGARCH(1,1) ........................................................................... 70 2.7. Conclusion .......................................................................................................... 72 2.8. Appendix for Chapter 2........................................................................................ 75 3.1. Introduction ............................................................................................................ 81 3.2. Literature review ..................................................................................................... 82 3.2.1. Currency or Asset ................................................................................................... 84 3.2.2. Factors Determination ............................................................................................ 85 3.2.2.1. Macroeconomic theory ............................................................................................... 85 3.2.2.2. Media and search engine ............................................................................................ 86 3.2.2.3. Transaction .................................................................................................................