Examining the Effect of Monetary Policy and Monetary Policy Uncertainty on Cryptocurrencies Market

ArXiv ID: 2311.10739 “View on arXiv”

Authors: Unknown

Abstract

This study investigates the influence of monetary policy and monetary policy uncertainties on Bitcoin returns, utilizing monthly data of BTC, and MPU from July 2010 to August 2023, and employing the Markov Switching Means VAR (MSM-VAR) method. The findings reveal that Bitcoin returns can be categorized into two distinct regimes: 1) regime 1 with low volatility, and 2) regime 2 with high volatility. In both regimes, an increase in MPU leads to a decline in Bitcoin returns: -0.028 in regime 1 and -0.44 in regime 2. This indicates that monetary policy uncertainty exerts a negative influence on Bitcoin returns during both downturns and upswings. Furthermore, the study explores Bitcoin’s sensitivity to Federal Open Market Committee (FOMC) decisions.

Keywords: Monetary Policy Uncertainty (MPU), Markov Switching Means VAR (MSM-VAR), regime switching, Federal Open Market Committee (FOMC), Cryptocurrency (Bitcoin)

Complexity vs Empirical Score

  • Math Complexity: 7.0/10
  • Empirical Rigor: 8.0/10
  • Quadrant: Holy Grail
  • Why: The paper employs a relatively advanced econometric technique (Markov Switching Means VAR) to model regime shifts in Bitcoin returns, but it is fundamentally an empirical, data-driven study using a substantial monthly dataset and focuses on backtest-ready findings like impulse response coefficients.
  flowchart TD
    A["Research Goal<br>Impact of MPU on Bitcoin Returns"] --> B{"Data Collection<br>Monthly: BTC, MPU<br>July 2010 - Aug 2023"}
    B --> C["Methodology<br>Markov Switching Means VAR<br>MSM-VAR"]
    C --> D["Computational Process<br>Estimate Regime-Switching Parameters"]
    D --> E{"Key Finding 1<br>Two Volatility Regimes"}
    E --> F["Regime 1: Low Volatility<br>MPU -> BTC: -0.028"]
    E --> G["Regime 2: High Volatility<br>MPU -> BTC: -0.44"]
    D --> H["Key Finding 2<br>Sensitivity to FOMC Decisions"]
    F --> I["Outcome<br>Negative MPU impact in all states<br>Stronger effect during high volatility"]
    G --> I
    H --> I