Volatility discovery in cryptocurrency markets

Cryptocurrency markets are notoriously noisy, but not all markets might behave in the exact same way. Therefore, we investigate which market contributes the most to the evolution of the common volatility component of cryptocurrency markets. We extract each of the markets’ latent volatility using a stochastic volatility model and subsequently model their dynamics in a fractionally cointegrated vector autoregressive model. We use the refinement of Lien and Shresta (2009, J. Futures Mark) to come up with unique Hasbrouck (1995, J. Finance) information shares and find that Bitfinex is the leading market for Bitcoin and Ripple while Bitstamp dominates for Ethereum and Litecoin. Based on the dominant market for each cryptocurrency, we find that Bitcoin volatility explains most of the volatility among the different cryptocurrencies.