Can climate risks affect cryptocurrency volatility? Fresh evidence from a GARCH-MIDAS-X model

Abstract

Significant climate change has aroused public attention and prompted concentrated research on its impact on the financial market. Using the index of cryptocurrency environmental attention as a proxy for climate risk, this paper investigates the impact of climate risks on cryptocurrency volatility using GARCH-MIDAS (GM)-based models. The in- and out-of-sample analyses demonstrate that climate risks can negatively affect cryptocurrency volatility. The CVI index is positively related to short-term volatility, and the inclusion of it can increase the goodness-of-fit of GM-based models. Moreover, we find that GM-X-student’s t model achieves the best out-of-sample forecasting capability and always enters the model confidence set. These conclusions remain robust for alternative data frequency, green cryptocurrencies, and train-test splits.