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

摘要： 从地缘政治风险角度出发,采用GARCH-MIDAS模型,检验了不同地缘政治风险指数对比特币及整个数字货币市场波动率的影响及预测能力。全样本结果表明,地缘政治风险是影响比特币和数字货币市场波动率的重要因素,除印尼外,其余地缘政治风险指数对比特币波动率均存在显著的负面影响;不同的地缘政治风险指数对数字货币市场波动率的影响存在异质性。样本外预测结果说明,地缘政治行为(GPA)和地缘政治威胁指数(GPT)分别对比特币和数字货币市场的波动率拥有最佳的预测能力。进一步提出,地缘政治风险是数字货币市场波动的关键外部驱动因素,监管机构应着重关注地缘政治风险的变化,避免数字货币市场的非常规波动影响到国内的金融市场。

关键词: 地缘政治风险, 数字货币, 波动率, GARCH-MIDAS