The Journal of Economic Studies and Policies

The Journal of Economic Studies and Policies

Investigating the impact of cryptocurrency tail risk on liquidity and exchange rates growth with time varying parameters (TVP-VAR)

Document Type : Original Article

Authors
1 Assistant Professor, Department of Economics and Management, University of Qom, Qom, Iran.
2 Associate Professor, Department of Economics and Management, University of Qom, Qom, Iran.
3 M.A in Economics, Department of Economics, University of Allame Tabatabae, Tehran, Iran.
Abstract
The purpose of this study is to estimate the cryptocurrency tail risk and its effects on macroeconomic variables, especially real exchange rates and liquidity growth in Iran have been evaluated. For this purpose, statistical information for the period 2010-2020 based on the frequency of monthly data has been used. The approach used in this paper was the vector autoregression method with time-varying parameters (TVP-VAR). In the first part, the risk tail index was extracted using the threshold value for cryptocurrencies (bitcoins). Comparing the results of the VAR and TVP-VAR models, it can be seen that the shock from the Bitcoin virtual currency area has led to an initial decline in liquidity growth and exchange rates. However, after 2 periods, the effect of this shock reached its highest value and led to an increase in the growth of liquidity and the exchange rate, and the effect of this shock disappeared in the long run and converged towards the equilibrium value. The results obtained from the shock from the virtual currency area in the VAR model show that the variables of liquidity growth and exchange rate in all three cases have shown a positive reaction to this shock and the effect of this shock has disappeared in the long run.
Keywords

Bibliography
Askarzadeh, Gh., & Dehghanizadeh, N. "Investigating the Risk of Investing in Digital Currencies in the Iranian Stock Exchange." the first national conference on management and economics with the approach of resistance economics, Mashhad, (2019). [In Persian]
Atilgan, Y., Bali, T. G., K., Demirtas, O., & Gunaydin, A. D. “Left-Tail Momentum: Underreaction to Badnews, Costly Arbitrage and Equity Returns.” Journal of Financial Economics, no. 3 (2018): 725-753.
Babaloyan, Sh., Niko Maram, H., Vakilifard, H., & Rahnamai Rood Poshti, F. "Comparison of risky value of Tehran stocks with international stock markets using Farin conditional value theory." Financial Economics, no. 52 (2020): 55-80. [In Persian]
Borri, N. “Conditional tail-risk in cryptocurrency markets.” Journal of Empirical Finance, no. 3 (2019): 1-19.
Chan, W. S. (2003). “Stock Price Reaction to News and No-News: Drift and Reversal after Headlines.” Journal of Financial Economics, no. 1 (2003): 223- 260.
Chen T, Lau CKM, Cheema S & Koo CK. “Economic Policy Uncertainty in China and Bitcoin Returns: Evidence from the COVID-19 Period.” Front Public Health, no. 1 (2021): 55-69.
Dasgupta, S., Gan, J., & Gao, N.  “Transparency, price informativeness, and stock return synchronicity: theory and evidence.” Journal of Financial and Quantitative Analysis, no. 5 (2010): 1189-1220.
Eliborri, V., Li, J. V., & Sopranzetti, B. J. “Unrealistic Optimism and Asymmetry in the Pricing of Equity Tail Risk.” Working paper, (2018).
Fama, E. F. “The Behavior of Stock Market Prices.” Journal of Business, no. 4 (1965): 34-105.
Harvey, C. R. “Predictable risk and returns in emerging markets.” Review of Financial Studies, no. 3 (1995): 773-816.
Hong, H., Lim, T., & Stein, J. “Bad news travels slowly: Size, analyst coverage and the profitability of momentum strategies.” Journal of Finance, no. 1 (2010): 265-295.
Khezri, M., Sahabi, B., Yavari, K., & Heidari, H.  "Time-varying Effects of Inflation Determinants: State-space Models." Economic Modeling, no. 30 (2015): 25-46. [In Persian]
Li, T., Ma, F., Zhang, X. & Zhang, Y. “Economic Policy Uncertainty and the Chinese Stock Market volatility: Novel Evidence.” Economic Modelling, no. 3 (2020): 24-33.
Li, Y., Chen, K., Collignon, S., & Ivanov, D. “Ripple effect in the supply chain network: Forward and backward disruption propagation, network health and firm vulnerability.” European Journal of Operational Research, no. 3 (2021): 1117–1131.
Long, H., Jiang, Y., & Zhu, Y. “Idiosyncratic Tail Risk and Expected Stock Returns: Evidence from the Chinese Stock Markets.” Finance Research Letters, no. 1 (2018): 129-136.
Mandelbrot, B. “The Variation of Certain Speculative Prices.” Journal of Business, no. 2 (1963): 392-417.
Manganelli, S., & Engle, R. F.”Value at Risk Models in Finance.” ECB Working Paper, no. 75 (2001).
Nguyen, D. B. B. “Tail Risk and Long Memory in Financial Markets (Doctoral Dissertation)”, Institutionelles Repositorium der Leibniz Universität, (2018).
Sebastião, H., Godinho, P. “Forecasting and trading cryptocurrencies with machine learning under changing market conditions.” Financial Innovation, no. 3 (2021): 1-24.
Shahrzadi, M., Foroghi, D., & Amiri, H. "The Effect of Left Tail Risk on Expected Excess Returns and Its Consequences on the Persistence of Left Tail Returns." Financial Research Journal, no. 4 (2020): 593-611. [In Persian]
Shahrzadi, M., Forooghi, D. (2020). "Individual Investors’ Attention to Left Tail Risk." Journal of Asset Management and Financing, no. 2 (2020): 69-88. [In Persian]
Wong, W. S., D. Saerback, & Delgado, S. “Cryptocurrency: A New Investment Opportunity? An Investigation of the Hedging Capability of Cryptocurrencies and Their Influence on Stock, Bond and Gold Portfolios.” Mimeo, (2018).
Zamani, Sh., Eslami Bidgoli, S., & Kazemi, M. "Calculating the Value at Risk of the Tehran Stock Exchange Index Using Farin Value Theory." Quarterly Journal of the Stock Exchange, no. 6 (2013): 136-115. [In Persian]
Send comment about this article
Enter Name.
Enter a valid email address.
Enter a vaid affiliation.
Enter comments (At leaset 10 words)
CAPTCHA Image
Enter Security Code Correctly.