Investigating volatility transmission and hedging properties between Bitcoin and Ethereum

Abstract

This paper sets out to test the hypothesis whether volatility spillovers and hedging abilities exist between Bitcoin and Ethereum by a multivariate BEKK-GARCH methodology and impulse response analysis applied within a VAR model since the launch of Ethereum up to June 2018. The findings reveal significant swaps in the time-varying correlation and a delayed positive response of Bitcoin volatility on a positive volatility shock on Ethereum returns. The overarching implications of the results are that Bitcoin and Ethereum although presented some diversifying capabilities over the first years of the study these capabilities are recently significantly reduced. Moreover, the unidirectional volatility transmission from Ethereum to Bitcoin implies that profitable trading strategies may be established on a newly developed derivative market with consequences against market efficiency. © 2019 Elsevier B.V.