“Unveiling the intriguing risk premiums of Bitcoin and Ethereum in the midst of the COVID-19 and non-COVID-19 eras: A high-frequency mathematical exploration.”
The COVID-19 pandemic had a significant impact on the global economy and financial markets. In 2020 and 2021, the effects of the pandemic were even greater than those of the 2008 financial crisis. High global inflation rates and aggressive anti-recessionary policies were the two main economic consequences of the pandemic.
In the United States, inflation levels reached a historical maximum of 7.9% in February 2022, leading to negative growth in the global economy. The US GDP saw a reduction of 19.2% between the last quarter of 2019 and the second quarter of 2020, and the unemployment rate reached 14.7% in April 2020, representing 23.1 million people without jobs.
Financial markets experienced a crash, with money transferring from the stock market to treasury bonds. However, there was a significant recovery during the second quarter of 2020.
The behavior of the cryptocurrency market, particularly Bitcoin and Ethereum, was different from traditional financial markets. Cryptocurrency trading is supported by Blockchain technology, which has distinctive characteristics such as no financial intermediaries, decentralization, security, anonymity, and 24/7 operation.
In this study, the authors analyze the time dynamics of risk premium for Bitcoin and Ethereum during the COVID-19 and non-COVID-19 periods. They use high-frequency data and a GARCH(1,1)-M-NIG model to model the risk premium and observe its parameters throughout the observation period. The results show variations in the risk premium parameter during different subperiods, providing valuable information for risk management and decision making.
The study contributes to a better understanding of the variability of Bitcoin and Ethereum by modeling their returns and volatility. The findings can support investors in improving their investment and risk management practices.
Overall, the COVID-19 pandemic had a significant impact on the global economy and financial markets. While traditional financial markets experienced a crash and recovery, the cryptocurrency market showed different behavior. Understanding the dynamics of risk premium in cryptocurrencies can aid in decision making and risk management in this volatile market.