"Decoding Cryptocurrency Volatility: A Comparative GARCH, TGARCH, And EGARCH Analysis Of Bitcoin, Litecoin, Ethereum, And XRP"

Abstract

This research paper presents an in-depth analysis of the volatility dynamics of four major cryptocurrencies—Bitcoin, Litecoin, Ethereum, and XRP—using advanced GARCH, Threshold GARCH (TGARCH), and Exponential GARCH (EGARCH) models. The objective is to examine the effects of past shocks and volatility on the current returns of these digital assets, as well as to explore the presence of asymmetries in their volatility behavior.ForBitcoin, the results indicate a minimal influence of past volatility and errors on its current returns, with no significant drift observed in its volatility patterns. Unlike traditional assets, Bitcoin shows no significant asymmetry in response to past shocks, highlighting its unique behavior as an asset class.In the case of Litecoin, the analysis reveals a strong and significant impact of past values and errors on its volatility. Notably, the TGARCH model highlights significant negative effects from negative shocks, suggesting that Litecoin's volatility is highly sensitive to market turbulence and negative events.Ethereum demonstrates significant negative impacts on volatility from past values and errors across all models. The EGARCH model identifies significant negative moving average effects, while the TGARCH model further emphasizes Ethereum's vulnerability to negative shocks, indicating a complex and asymmetrical volatility structure.Finally, XRP exhibits significant negative moving average effects and minimal influence from past values and shocks. Although past volatility has some impact, the GARCH model reveals that XRP is less reactive to market fluctuations compared to other cryptocurrencies.The study's findings underscore the heterogeneous nature of cryptocurrency volatility, with each asset displaying distinct volatility characteristics. For investors, these insights emphasize the need for tailored risk management strategies that account for the unique volatility behavior of each cryptocurrency. Moreover, the results contribute to the broader literature on financial market volatility, particularly in the rapidly evolving cryptocurrency space, offering a foundation for future research and practical implementation in portfolio management.