Modelling Asymmetry and Leverage in Cryptocurrencies and Emerging Financial Markets

Abstract

This paper investigates asymmetry and local leverage behaviour in individual and aggregate markets of leading cryptocurrencies, and compares such characteristics to diverse traditional emerging asset classes. Generally different from the cryptocurrencies, the results show diffuse evidence of asymmetry and a significant presence of local leverage in the emerging markets. New findings indicate that mega‐size cryptocurrencies like Bitcoin and Ripple exhibit return‐volatility behaviour whereby volatility changes in their markets increase rather by a response to positive shocks than by a response to negative shocks. Akin to safe net assets, particularly gold, the inverse asymmetric reactions of the cryptocurrency markets position them distinctively from the existing emerging markets, suggestive that the digital assets stand to offer potentials beyond being diversifiers.