关键词: 地缘政治风险, 数字货币, 波动率, GARCH-MIDAS

Abstract: Cryptocurrency has emerged as a new form of liquidity and investment since their market value exploded in 2017. In the short term, the market fluctuation of cryptocurrency is affected by investor sentiment, economic environment, political situation and other uncertain factors. The market fluctuation trend is extremely unstable and is still in an invalid or weak effective state. The bubble caused by the malicious speculation of speculators in the immature cryptocurrency market will seriously affect the current financial order, even induce risks in the financial system and affect the overall national security. Based on the fundamental needs of “preventing and defusing major financial risks” and “adhering to the overall national security concept”, it is particularly important and necessary to build an effective regulatory system for the financial risks that may rise from digital currencies in advance, promote the healthy, orderly and sustainable development of digital finance, and ensure the stability of the financial system and the overall national security in the new era.
How to discover the factors driving the volatility of digital currency market from the uncertainties has become the focus of scholars. One of these uncertainties is geopolitical risk, which not only reflects tensions among countries, but also affects various economic activities such as finance and investment. The change of geopolitical risk is reflected in the financial market, which most obviously causes the price fluctuation of financial assets. As an emerging financial asset, digital currency may also be affected by geopolitical risk. Therefore, it is necessary to start from the perspective of geopolitical risk, explore the impact of the uncertainty caused by geopolitical risk on the volatility of digital currency market, verify the prediction effect of the change of geopolitical risk index on the price volatility of digital currency, and then judge the market trend of digital currency, so as to provide the basis for the policy making of regulatory authorities and rescue regulators.
In this regard, to examine the impact of geopolitical risk, an exogenous variable, on Bitcoin and cryptocurrency market volatility, as well as the predictive power of different geopolitical risk indices, based on GARCH-MIDAS, this paper constructs new extended models which include Geopolitics Risks (GPRs), Geopolitical Threat (GPT), Geopolitical Action (GPA) and geopolitical risk indices of five countries (Russia, Brazil, Turkey, China and Indonesia) with more active cryptocurrency transactions. The results of the whole sample show that geopolitical risk is an important factor affecting the volatility of Bitcoin and cryptocurrency market. Except Indonesia, the rest of geopolitical risk indices negatively impact Bitcoin market volatility, and the influence of different geopolitical risk indices on the volatility of cryptocurrency market is heterogeneous. The result of out-sample forecasts shows that GPA and GPT have the best predictive power for volatility in the Bitcoin andcryptocurrency market, respectively.
Overall, our results suggest that geopolitical risk is a key exogenous variable of volatility in cryptocurrency market, and regulators should focus on changes in geopolitical risk to avoid affecting domestic financial market due to unconventional fluctuations in cryptocurrency market. The results of this paper provide some enlightenment for potential investors and regulators. On the one hand, according to the geopolitical risk indicators of different types and regions, investors can use them as an important judgment basis to predict the future fluctuations of digital currencies, which can be used to improve portfolio strategies to avoid the blindness of investment, resulting in a large number of market bubbles. On the other hand, geopolitical risk, as an external factor driving the volatility of the cryptocurrency market, can be regarded as the judgment basis for predicting the trend of the cryptocurrency, and regulators can pay close attention to its changes and make a good early warning mechanism to prevent the unconventional fluctuations of the cryptocurrency market from affecting the domestic financial market and endangering the security of the financial system.

Key words: geopolitical risk, cryptocurrency, volatility, GARCH-MIDAS