Modeling factors affecting cryptocurrency return volatility

Since the creation of the first cryptocurrency, Bitcoin, blockchain technology and cryptocurrency, a product of blockchain technology, have shown significant development. While the area of use and awareness of cryptocurrencies is becoming widespread, Their integration with the financial system is increasing daily. Analyzing the factors affecting cryptocurrencies is important for investment decisions, asset allocation, risk management, portfolio selection, hedging, and financial stability decisions. This study aims to model the factors that affect cryptocurrency return volatility. In this context, the cryptocurrency index (CCI 30) was used to represent cryptocurrencies. The factors affecting cryptocurrencies have been determined as a result of the literature review and consist of gold (XAU), silver (XAG), commodity index (DJCI), energy commodities index (DJCIEN), S&P 500 index, CBOE volatility index (VIX) and dollar index (DXY) variables. The variables used in the study were converted into daily return series covering the period 01.01.2015-31.07.2022. Daily return series were analyzed via cADCC GJRGARCH and TVP-VAR, and structural break dates in cADCC were tested with ICSS. As a result of the analysis, it was observed that the relationship between the cryptocurrency index and the series in question was weak, and there were changes in the direction and degree of the relationship during the periods of global events. In contrast, the direction of the dynamic correlation between the cryptocurrency index and VIX and DXY is negative; positive with other series. The cryptocurrency index is the net receiver of the volatility spread in general throughout the entire period, and it has been observed that the interaction between the cryptocurrency index and other series has increased with the Kovid-19 period. The interaction between cryptocurrency and the factors it is associated with is weak for the whole period, but the negative relationship with VIX, one of the global risk indicators, shows that it moves in the same direction as some financial assets during global risk periods. The increase in the relationship of the cryptocurrency index with other series, especially in the Kovid-19 period, also reflects that it is unstable in terms of diversification and integration with the financial system has increased. In this respect, besides cryptocurrency market investors and financial advisors, authorities and policymakers should also consider the cryptocurrency market and prepare the ground for protecting investors and adapting to the future new financial system with the regulations they will make. Keywords: Blockchain, Cryptocurrency, Volatility, cADCC-GJRGARCH, TVP-VAR