Geopolitical risks and cryptocurrencies volatility: new safe haven asset in uncertain time? Garch-m-gjr-lev model approach

Abstract

In an increasingly volatile geopolitical landscape marked by insurgent groups, terrorism, and political conflicts, finding safe haven assets is crucial for investors. This study delves into this issue by empirically examining the relationship between geopolitical risks and cryptocurrency volatility. Utilizing a comprehensive dataset covering 10 cryptocurrencies over the period from 2014 to 2023, including both green and non-green varieties, we employ sophisticated econometric techniques such as the GARCH-M-GJR-LEV model to analyze the data. Our results reveal a noteworthy negative correlation between geopolitical risks and cryptocurrency volatility. This implies that as geopolitical tensions rise, cryptocurrency markets tend to stabilize, suggesting their potential as safe havens for investors during periods of heightened geopolitical uncertainty. Additionally, we observe a distinction between high and low geopolitical risk environments, indicating that cryptocurrencies serve as effective hedging assets particularly in times of geopolitical turmoil rather than stable market conditions. Furthermore, our analysis highlights the differential impact of geopolitical risks on green cryptocurrencies compared to non-green ones, with the former exhibiting stronger resilience. This underscores the growing importance of sustainability considerations in financial markets and the potential for green cryptocurrencies to offer enhanced hedging capabilities. Robustness tests and additional analyses further support our main findings, providing empirical evidence of the safe haven role of cryptocurrencies, especially green ones, during geopolitical turmoil. These findings offer valuable insights for investors seeking hedging instruments amidst economic and financial uncertainty, as well as for policymakers and regulators in understanding the implications of geopolitical dynamics on cryptocurrency markets.