Cryptocurrency volatility and market response: A GARCH-based analysis of trading volumes in financial firms

Abstract

This research aims to investigate the connection between trading volume and volatility in cryptocurrency prices on leading exchanges, namely Bitfinex, Coinbase, and Kraken. It explores the application of regression and correlation analysis and whether volatility has a significant impact on trading activity, based on 60 observations. The trading volumes and price volatilities of the three exchanges showed positive correlation with each other, with coefficients of 0.6408, 0.6372, and 0.6452, respectively, and this implies that when price volatility is high, the trading volume is high on all three exchanges. Volatility on a single exchange has an impact on trading activity, but not as much as trading activity on the cryptocurrency exchange as a whole. Regression analysis also shows that volatility on each individual exchange does contribute to the overall fluctuations in trading activity. Based on the results, volatility seems to be a systemic behavior exhibited by investors and market liquidity in cryptocurrency markets. The study's conclusions help investors create risk management plans, financial institutions enhance their volatility forecasting instruments, and regulators keep an eye on the systemic risks associated with digital assets. The results emphasize the need for flexible approaches to navigating the turbulent cryptocurrency landscape.