The common risk drivers of cryptocurrency markets

Abstract

This study examines the latent common volatility factor in cryptocurrency markets using daily data for ten major cryptocurrencies from January 2018 to September 2025. It estimates the common volatility factor (COVOL) within the factor-volatility framework of Engle and Campos-Martins (2023) and it identifies its determinants using machine learning and SHAP analysis. Results reveal a statistically significant common volatility factor that intensifies during major macroeconomic events and crypto-specific shocks. Bitcoin exhibits the highest exposure, while global financial stress and investor sentiment are found to be the primary drivers. This paper provides the first direct estimation of a common volatility factor in cryptocurrency markets, demonstrating their increasing integration with global financial conditions and offering important implications for risk management and portfolio diversification.