Khóa luận tốt nghiệp: The effects of geopolitical risks and economic policy uncertainty on cryptocurrencies

Therefore, the price of Bitcoinskyrocketed, highlighting the immediate response of the cryptocurrency market togeopolitical uncertainties On the other side of cryptocurrency market, Jama

VIETNAM NATIONAL UNIVERSITY, HA NOIUNIVERSITY OF ECONOMIC & BUSINESS

GRADUATE DISSERTATION

THE EFFECTS OF GEOPOLITICAL RISKS AND ECONOMIC POLICY

UNCERTAINTY ON CRYPTOCURRENCIES

Instructor: Ms Pham The Thanh

Student: Tran Thao Linh

Student ID: 20050474

Hanoi — 10/2023

ACKNOWLEDGEMENTThe process of undertaking and completing a graduation thesis signifies a pivotal andtransformative juncture in the life of every student Such a scholarly endeavor is ofparamount importance, serving as the foundation upon which we acquire essentialresearch skills and the knowledge that will be of immense value as we venture into ourfuture careers.

I wish to extend my heartfelt gratitude to the esteemed Board of Directors, dedicatedfaculty, and supportive lecturers at the University of Economics - Hanoi NationalUniversity, especially within the Faculty of Finance and Banking Their unwaveringcommitment to imparting knowledge and nurturing students has been instrumental inshaping my academic journey The invaluable insights and expertise that I have gainedfrom their tutelage within the lecture halls have undoubtedly laid a robust groundwork,allowing me to navigate the intricate terrain of thesis completion

In this context, I would like to express my deep appreciation to Master Pham The Thanh,whose direct mentorship and provision of essential documents and scholarly resourceshave been pivotal in guiding me throughout the process of this thesis His guidance andsupport have proven invaluable in achieving the successful completion of this academicpursuit

However, I am well aware that, given my limited knowledge and experience, this thesismay bear some imperfections and shortcomings I welcome, with great anticipation, anycomments, criticisms, and constructive feedback that will be offered by my peers,mentors, and members of the academic community These insights, I believe, will notonly serve as a testament to the collaborative nature of scholarly pursuits but also as avaluable foundation upon which I can continually enhance my abilities and knowledge

in the future

I extend my sincere thanks to everyone who has contributed to my academic journey,and I am eager to embark on this path of continuous improvement and growth

Lecturer's Confirmation Student's confirmation

Tran Thao Linh

TABLE OF CONTENTSACKNOWLEDGEMEENT, - G- G1 HT TH HH nu HT TH nh 2IBRS9)0.)0-.17 5LIST OF FIGURES 17 6

CLYPLOCUITENCIECS ceesccesceescecsseceseeseseceseecsaeeescessceceseeesaeceseeececeaeeeseeseaeeeseeseaeeeteeseaeeeaes 131.1.1.2 The impact of geopolitical risks on financial aSSefS - «<< <<+<c<s+2 151.1.1.3 The impact of economic policy uncertainty on financial assetfs - 171.1.2 Summary and Knowledge Gap ceececscesseeeseceseeeseecseeeeeeceaeeeseeseaeeeseeeeaeeees 191.2 Theoretical and practical basis - - - << 11311311191 19911 91199 1 ng ng 191.2.1 The concept of CryptOCurrencies SG 5101190 9911 9111 vn ng 191.2.2 The concept of geopolitical risk 5 <6 2 1x13 1E 91 ng triệt 201.2.3 The concept of economic policy Uncertainty 5 5+ +<+++s£+s++ces++ 22CHAPTER 1 SUMMARYYY - Gv HH TH TH nh HH Hết 24CHAPTER 2: DESIGN AND RESEARCH MODEL, - 5c svseeseeses 252.1 Data AeScription nh ốc 252.2 The specification of the var MOdel] -.- c2 + 33+ 3333 E**EEEvEEEeeeeeereeesereerreeee 26

2.3 Unit root tests SỪỪỪỪỔỮÚỒẶ Á 27

PP 8 oi 0o 282.5 Series Correlation fSfS 0 nghệ 292.6 Heteroskedasticity fŒSS LH TH HH HH HH HH 292.7 Inverse Roots of AR Characteristic Polynomial - - « «<< s+++se++sexssess 30P.00) s6i- 309): s00) i1) in 30CHAPTER 2 SUMMARY: 11 33454 31CHAPTER 3: EMPIRICAL RESULTS & DISCUSSION - -<c<c<<+ 323.1 Specification tests 0.0 32

3.1.1 Unit root tests for Bitcoin’s T€ẨUTT - - Gv HH ng ni, 32

3.1.2 Unit root tests for GEPÙ_ €urr€n( - «=5 + + + ***£+++2225 5 eeeeeeeee 323.1.3 Unit root tests for CIP - - 6 c cv 1k TH TH TH ng ngà 343.2 Experimental Results and VAR Model Discussion -««++- «<< s+<ss2 363.2.1 Lag length selection 363.2.2 Var model F€SUÏfS, s6 s1 19119119101 931 1 v0 TH HT HT Hết 373.2.3 Series Correlation fSÉS - s0 tk TH TH gu ng TH ng ngà 383.2.4 Heteroskedasticity f€S{S - HH HH HH Hà 39E021 roi an 403.2.6 Impulse response 00000005000: 18⁄4 40CHAPTER 3 SUMMARY Gà 45CHAPTER 4: POLICY IMPLICATIONS ng HH ri, 464.1 Implications for inVeStors - + 1111991991119 ng 464.2 Implications for government OrØaTI1ZAfIOTIS 5 c +< + +*kESeseeeeereereeers 46CONCLUSION an : :a333 47

LIST OF TABLES

Table 1: Unit root tests for Bitcoin’s r€fUTT SG 2112323111331 xe 32Table 2: Unit root tests for GEPU_CURRENÏT' - - G EEEEEEEY Y1 E91 x£ecee 33Table 3: DGEPU_ First-order difference - - - + + c8 EEEEE E3 v.v crree 34Table 4: Unit root tests for LOEgPL G1 199191 9n ng ng 35Table 5: Lag Length Se€Ï€CfIOI -G c3 0112118311 13 1111111 111 11 1 11 g1 ng ng rệt 36Table 6: Vector Autoregression EStITNAfS, c < + 11 1E 1 ng tr 37Table 7: VAR Residual Serial Correlation LM Tests - 55552 +2<<+++<<<s+2 38Table 8: Heteroskedasticity Tests cei eecsecsscssecsecssecsecssecseesaeessesseessesseesaeeseesseeseees 39

LIST OF FIGURESFigure 1: Inverse Roots of AR Characteristic PolynomialFigure 2: Impulse Response Eunction -

I INTRODUCTION

1 Rationale

The world has been facing various detrimental events such as: wars, terrorism, military,

or unanticipated changes that might affect the global economy and certain countries Anillustration, recent escalations in military tensions between North Korea and the UnitedStates as analyzed by Kyung-Ae Park et al (2010), or the expanding trade disputesbetween the United States and China, as discussed by C Fred Bergsten (2018), couldhave substantial indirect impacts on the global business landscape and the investmentcommunity These developments impact the stability of international trade policies,thereby leading to increased volatility in various assets, including Bitcoin Another case

in point is the heightened uncertainty in Turkey, which prompted Moody's InvestorsServices to downgrade Turkey's credit rating (Davis, 2016) Moreover, it's evident hownumerous corporations and nations are presently delaying their economic decisions due

to the unpredictability brought about by the COVID-19 pandemic Meanwhile,Muhammad Umar et al (2021), conducted an evaluation of the safe haven hypothesisfor Bitcoin amid a time span with three Presidential elections in the US, and recently,

an ongoing COVID-19 outbreak, which has been declared as a global pandemic.Geopolitical risks and economic policy uncertainty might make investors put more oftheir attention on virtual currencies because of its independence and there is nogovernment, financial institutions intervention or control Consequently, an inspection

is necessary for investors to examine and evaluate the effect of geopolitical risks andeconomic policy uncertainty on cryptocurrencies and to optimize their investmentportfolio

Bouri et al (2017a) suggest that the 2008 global financial crisis increased globaluncertainty, eased the emergence of cryptocurrency - Bitcoin and strengthened itspopularity as both a financial asset and an alternative currency to conventionaleconomies Cryptocurrency was born with playrole as a potential market that allowspeople to directly participate in transactions without the intervention of intermediaries.Specifically in recent years, Cryptocurrencies have emerged as a disruptive force in theglobal financial landscape A cryptocurrency is a digital, encrypted currency The nature

of the cryptocurrency market is decentralized and borderless, by Katarina FrajtovaMichalikova (2021), also because of this, it could make the cryptocurrency market have

a notably sensitive taste with geopolitical risks and economic policy uncertainty Hence,

if a country has any changes on their politics that lead to adverse events like terrorism,war, tension among states or government’s adjustments in covid-19 epidemic period ,all those factors could have a significant impact on the volatility of cryptocurrencies

Cryptocurrencies have witnessed a series of remarkable historical events In 2013,

Bitcoin experienced a significant price surge, briefly reaching $1,000 before rapidly plummeting to around $300 This decline was triggered by the People's Bank of China

issuing a ban on interbank transactions involving the Bitcoin virtual currency (BBC

News) Nevertheless, Bitcoin's price quickly rebounded and surpassed $1,000 once

again In 2017, as reported by Forbes Journal, the cryptocurrency market saw asubstantial influx of funds, with the total market capitalization of all cryptocurrencies

surging from $11 billion to over $300 billion Bitcoin itself reached a historic high of

$20,000 by the end of the year, signaling growing investor interest in cryptocurrencies.

However, similar to its previous peak at $1,000, the triumph of reaching $20,000 was

short-lived, as Bitcoin subsequently experienced a sharp drop, losing more than 60% ofits value within a few months Halen Partz (2022) delved into the history of Bitcoincrashes and bear markets spanning from 2009 to 2022 The research revealed a

significant bullish trend, with Bitcoin reaching a yearly peak of $68,000, marking it as

one of the most prosperous years for Bitcoin Nonetheless, the mini bear market of 2021raised concerns about Bitcoin mining's environmental, social, and corporate governanceissues Notably, Elon Musk's electric car company, Tesla, announced the suspension ofBitcoin as a payment method in May 2021, resulting in a substantial decline in Bitcoin'sprice Consequently, Bitcoin experienced a rapid descent and entered a bear market inlate 2021 This downturn reached its peak in 2022, further exacerbating the ongoing bearmarket The collapse of Terra had a cascading effect on the entire cryptocurrency market,fueled by massive liquidations and a climate of uncertainty, ultimately pushing

cryptocurrency lending to plunge below the $20,000 threshold.

Numerous coins have been created such as Ethereum, Litecoin, Ripple Nevertheless,Bitcoin is the most valuable, wellknown coin and primary coin that has drawn theinterest of policy makers, financial institutions, commercial enterprises, media, scholarsacross diverse disciplines or even individual investors all over the world As reported byCNBC, both El Salvador and the Central African Republic are among the countries that

officially recognize Bitcoin as a legitimate digital currency A striking example of theCyprus financial crisis between 2012 and 2013, describing an adverse event thatreflected the collapse of the Cyprus economy Cypriot banks showed over-reliance onlocal real estate companies by using excessive leverage, and the knock-on effect of theGreek government debt crisis, or even international credit rating agencies downgradedthe credit status of Cyprus government bonds That led to Cyprus having to declare avital decision in which a bailout was accepted and it required imposing a one-time levy

on bank deposits However, this has sparked controversy that making traditional depositaccounts seem to be less secure Consequently, fears of security, bank closures, capitalcontrols, investors seemed to want to seek alternative assets William J Luther et al(2017), investigated the number of downloads of bitcoin apps increased following thebailout announcement, which demonstrated there is interest in Bitcoin, Bitcoin could beregarded as one of the initial priority digital currencies that investors had preferred tohold at that time Bitcoin, with its promise of financial autonomy and resistance togovernment interference, became a refuge for many Therefore, the price of Bitcoinskyrocketed, highlighting the immediate response of the cryptocurrency market togeopolitical uncertainties

On the other side of cryptocurrency market, Jamal Bouoiyour et al (2017), inspectedthat there was a series of important economic policy uncertainty events and theirconsequences in 2016, which might be first mentioned during a bull state of the market,

a sequence of event coming one after the other those are the use of Bitcoin in trade, theyuan deterioration, the uncertainty surrounding Brexit and India’s demonetization wereconsidered as the most potential contributors of Bitcoin price Furthermore, an intenseanxiety over Donald Trump being the president of the United States was shown to be apositive determinant pushing up the price of Bitcoin when the market is functioningaround the normal mode Last but not least, the velocity of bitcoins in circulation, thegold price, the Venezuelan currency demonetization and the hash rate were found to bethe fundamentals influencing the Bitcoin price when the market is heading into decline

In conclusion, because the fears over the continued deterioration of yuan against U.S.dollar have pushed Chinese traders and investors to place their bets and investments inBitcoin Moreover, the anxieties over the Brexit and 2016 U.S presidential elections

outcomes have encouraged investors to seek a secure alternative Since the more demand,the less supply that made a great contribution to the increase of Bitcoin’s price.

Therefore a question is concerned - what impacts the volatility of the cryptocurrencymarket? There have appeared a number of research articles that have mainly investigatedMacroeconomic Determinants of Cryptocurrency Volatility (Dilek Teker et al, 2020),Volatility in the Cryptocurrency Market (Jinan Liu & Apostolos Serletis, 2019) impliedthe relationship between volatility and returns of cryptocurrencies Even Though, thereare external factors impacting on cryptocurrencies that are being ignored The currentconditions of the national environment as geopolitical risks and the unstable economicpolicies might be crucial factors in analyzing and evaluating the crypto market Realizethat the empirical research on the geopolitical risks and economic policy uncertainty tocryptocurrencies is very limited, but these factors are really necessary for virtualcurrency investors to consider, evaluate the volatility of the market and limit maximumrisks Stemming from the above practical requirements, the research content focuses onanswering the question

The urgency of this topic lies not only in its historical precedents but also in its potentialfuture ramifications As cryptocurrencies continue to gain prominence, understandinggeopolitical risk, economic policy uncertainty, bitcoin interactions become paramount.This knowledge can guide investors, regulators, and policymakers in making informeddecisions and mitigating the risks associated with this burgeoning asset class

In conclusion, the cryptocurrency market's sensitivity to geopolitical risk and economicpolicy uncertainty is a pressing issue that demands our immediate attention Historicalevents and empirical studies provide ample evidence of the direct and immediate effects

of these factors on cryptocurrency prices and market behavior To navigate this volatilelandscape successfully, it is crucial that we delve deeper into the interrelationshipbetween geopolitics, economic policies, and cryptocurrencies

2 Research objectives and tasks

2.1 Research objectives

To comprehensively examine and analyze the impact of geopolitical risks and economicpolicy uncertainty on the behavior, adoption, and market dynamics of cryptocurrencies

throughout utilizing GPR index combined with EPU index and Bitcoin’s return and with

the aim of providing insights into the interactions between global politics, economicpolicy, and the cryptocurrency market

2.2 Research tasks

- Systematize general theoretical and practical issues about the effects of geopolitical

risks, economic policy uncertainty and the reaction of cryptocurrencies

- Examine and analyze the interaction of geopolitical risks, economic policy

uncertainty and Bitcoin’s return

- Evaluating whether Bitcoin can be categorized as a safe-haven asset

- Suggesting policy implications for investors and government organizations

3 Research question

How do geopolitical risks and economic policy uncertainty affect bitcoin's return?

What is the interplay between geopolitical risks, economic policy uncertainty andbitcoin returns?

Does Bitcoin function as a reliable safe-haven asset during periods characterized byheightened geopolitical risk and economic policy uncertainty?

What are the policy implications for investors and government organizations?

4 Research subjects and scopes

4.1 Research subjects

The study focuses on observing values about geopolitical risks, economic policy

uncertainty, bitcoin’s return

5 Research methods

On the basis of the methodology, the following methods are used in the implementation

process:

- Secondary Data Analysis

- Time Series Analysis

Chapter 2: Design and Research Methods

Chapter 3: Empirical results & discussion

Chapter 4: Policy implications

CHAPTER 1: OVERVIEW OE RESEARCH SITUATION, THEORETICALAND PRACTICAL BASIS

1.1 Overview of the research situation

Geopolitical factors like terrorism, warfare, and political tensions, as well as economicpolicy uncertainty regarding fiscal, monetary, and regulatory policies, directly impactthe currency market The government might consider adjusting policies consisting oftax policy, interest rates and other financial regulations unexpectedly In addition, theseadverse events may cause of the instability and uncertainty about the economic andpolitical future trends It's evident that these issues have a detrimental effect on the stockmarket These changes could lead to a dramatic impact on the profits of businesses andaffect people's anxiety about a decline trend in the value of the stock market Therefore,investors might be more looking for alternative assets to limit the risk on their portfolioinvestment In the past few years, the cryptocurrency market has drawn attention frompeople in relevant-fields all over the world Nonetheless, the fluctuation ofcryptocurrencies, especially bitcoin’s return is still a questionable mark for investors.Therefore, numerous domestic and international studies have focused on studyingfactors that can significantly affect bitcoin’s return Geopolitical risks and economicpolicy uncertainty are one of more interest to researchers than ever

highlighting a degree of interdependence between these factors However, itdemonstrates different reactions when it comes to China's EPU and GPR, suggestingthat Bitcoin's volatility is influenced differently by these geopolitical and economicfactors in the two countries Summarily, the research concludes that Bitcoin serves as ahedge against U.S economic policy uncertainty and geopolitical risk, providing a degree

of protection for investors during periods of economic and geopolitical turbulence

Additionally, Sanjeet Singh et al (2022) conducted a study on the correlation betweengeopolitical risk, economic policy uncertainty, and Bitcoin in P5 + 1 nations Theirresearch employed partial and multiple wavelet coherence analysis and revealed a strongpositive connection in the short term between all pairs of economic policy uncertainty(EPU), geopolitical risk (GPR), and Bitcoin returns This underscores theinterconnectedness of these factors in the cryptocurrency market

In another study, Francisco Colon et al (2021) investigated the performance of Bitcoin

as a hedge against geopolitical risk (GPR) in a sample of 25 cryptocurrencies Theirfindings indicated that, in most cases, Bitcoin served as a robust hedge against GPR.However, it was found to be a weaker hedge and a less effective safe haven during abull market, suggesting that Bitcoin's role as a hedge may be contingent on marketconditions

Md Al Mamun (2020), the impact of geopolitical risk, global economic policyuncertainty, and U.S economic policy uncertainty on Bitcoin's structure was explored.The research revealed that both geopolitical risk and global economic policy uncertaintyled to an increased risk premium for Bitcoin, particularly in distressed market conditions.Furthermore, during periods of high policy uncertainty and deteriorating economicconditions, Bitcoin was found to serve as a hedge alongside traditional safe havens likegold, providing investors with a potential diversification strategy during times ofeconomic and geopolitical uncertainty

In a study by a recent investigation by Ngo Thai Hung et al (2023), an analysis wascarried out to examine the impact of various uncertainty indices on Bitcoin The studyfocused on the assessment of six primary uncertainty indices, namely, Global EconomicPolicy Uncertainty, Equity Market Volatility, Twitter-based Economic Uncertainty,Geopolitical Risk Index, The Cryptocurrency Policy Uncertainty Index, and TheCryptocurrency Price Uncertainty Index, utilizing monthly data spanning from January

2014 to December 2022 By employing an alternative methodology, the study's findingsrevealed a negative correlation between Bitcoin prices and the selected uncertaintyfactors These results suggested that heightened levels of uncertainty were associatedwith reduced fluctuations in Bitcoin's value across both time and frequency domains.

Ina parallel study, Toan Luu Duc Huynh et al (2023) delved into the predictive potential

of economic policy uncertainty concerning Bitcoin's returns, trading volumes, and pricevolatility Their investigation encompassed the period spanning from May 2013 to June

2019, and this examination was subsequently extended to include data up until May

2020, a period marked by the profound impact of the COVID-19 pandemic Utilizingthe transfer entropy model, the study segregated the data into two distinct regimes: onemarked by stationarity and the other is nonstationary assumption nonstationarity Thestudy's outcomes revealed a negative correlation, indicating that global Economic PolicyUncertainty had an adverse impact on both Bitcoin trading volumes and price volatility

A published article by Binh Nguyen Quang et al (2020), conducted a comprehensiveinvestigation into the influences of various factors, including world uncertainty (WUD),global economic policy uncertainty (GEPU), and geopolitical uncertainty (GUI), on thereturns and liquidity of 964 cryptocurrencies This study encompassed the period fromApril 28, 2013, to July 14, 2018 The findings of the research indicated that an increase

in GEPU had a notably adverse effect on the returns of cryptocurrency portfolios, while

a higher WUI had a significantly negative impact on the cryptocurrency portfolios’liquidity, especially for the medium sub-portfolio Notably, there were discernibledifferences in the effects of uncertainty, as proxied by GEPU and WUI, on bothcryptocurrency portfolio returns and liquidity Intriguingly, the research did not uncoverany significant impact of GUI on the returns and liquidity of cryptocurrency portfolios.1.1.1.2 The impact of geopolitical risks on financial assets

Geopolitical risks have a profound impact on various financial assets, as evidenced by

a series of recent studies Caldara and Jacoviello (2022) draw attention to the pivotalrole geopolitical risks play in shaping investment decisions and influencing thedynamics of stock markets Employing vector autoregressive (VAR) models, theirinvestigation spans from 1985 to 2019, focusing on the United States The resultsunveiled a compelling narrative: geopolitical risk shocks trigger prolonged downturns

in investment, employment, and stock prices Notably, these adverse effects persist due

to both the anticipation and realization of unfavorable geopolitical events, indicating theprofound impact of these risks.

Georgios P Kouretas et al (2022) delve into the repercussions of geopolitical risks onstock returns across a diverse panel of 22 countries, spanning from 1985 to 2020 Theirmeticulous analysis incorporates macroeconomic and market structure variables,accounting for the potential influence of the 2007-2009 financial crisis The outcomes

of their study reveal a robust and statistically significant negative correlation betweengeopolitical risks and stock returns In practical terms, the research underscores that aone-unit standard deviation increase in geopolitical risks can potentially reduce stockreturns by a substantial margin, ranging from 10.53% to 42.14% of the sample mean

Ender Demir et al (2022) direct their focus towards unraveling the hedging properties

of different asset classes, particularly in the context of the Russian invasion of Ukraine

in 2022 Employing a specialized approach, wavelet coherence analysis, the studydissects the response of diverse types of securities to fluctuations in geopolitical risk.The findings are illuminating, revealing that various asset classes exhibit distinctsensitivities to geopolitical risk in terms of both magnitude and timescale While bondsand stocks exhibit a robust coherence in their reactions over multi-week horizons,currencies display a heightened sensitivity to shorter-term fluctuations Notably, greenbonds, gold, silver, the Swiss franc, and real estate emerge as stalwart assets,demonstrating resilience against the tremors of geopolitical risk These findings indicatethat these assets may serve as effective hedges against the uncertainties generated bygeopolitical risks

The exploration of the relationship between geopolitical risks and financial assetsextends further with the work of Thomas C Chiang (2021), whose research delves intothe intricate dynamics of the Chinese market Chiang's study delves into the correlation

between the absolute changes in geopolitical risk (|AGPRt|) and the returns of stocks,

bonds, and gold The analysis reveals a noteworthy observation: the correlationsbetween stock-gold returns and heightened |AGPRt| are positively intertwined,underscoring the influence of geopolitical risk on asset returns in the Chinese context.Adding another layer to this intricate tapestry, Dirk G Baur and Lee A Smales (2020)venture into the distinct realm of precious metals Their analysis underscores thatgeopolitical risk stands apart from established measures of economic, financial, and

political risk Notably, their research shows that precious metals, particularly gold andsilver, function as reliable hedges against geopolitical risk in general, and morespecifically, geopolitical threats In stark contrast, stocks and bonds exhibit a negativecorrelation with geopolitical risk and geopolitical threats Furthermore, for extremegeopolitical risks, the sanctuary of reliable hedges is limited to gold and silver,underscoring their consistent safe haven properties This critical insight informsportfolio diversification strategies, emphasizing the importance of incorporatingprecious metals to mitigate the impact of geopolitical risk on financial assets.

Continuing this journey through the multifaceted domain of geopolitical risk, Mei-JingZhou et al (2020) embrace a time-varying parameter vector autoregression (TVP-VAR)model to unravel the intricate interactions between geopolitical risks (GPRs) and thestock returns and volatility of China's rare metals This multifaceted analysis extendsacross three distinct time horizons and four key time points, and it considers the nuancedvariations among five GPRs indexes and five rare metal stock markets The findings arenuanced and dynamic, revealing that the impulse responses to geopolitical risks are notonly time-varying but also highly diverse across rare metal stock markets and GPRsindexes In the short term, the impact of a benchmark GPRs index on the stock returns

of China's aggregate rare metals (RM) exhibits a positive trend before 2012 and turnsnegative afterward Simultaneously, its influence on stock volatility is predominantlynegative in most scenarios The source of geopolitical risks, characterized by the fourevents considered, exerts significant and disparate impacts on both stock returns andstock volatility within the RM market Among the four analyzed indexes, the act-basedGPRs index appears to exert a more pronounced negative impact on stock returns, whilethe broad GPRs index demonstrates stronger positive effects on stock volatility withinthe RM market These findings emphasize the need for dynamic, tailored, and targetedrisk-hedging strategies in China's rare metal stock markets, given the evolving anddiverse nature of geopolitical risks and their implications for financial assets

1.1.1.3 The impact of economic policy uncertainty on financial assets

A number of recent studies have shown that economic policy uncertainty has asignificant impact on various financial assets For example, In the study, Scott R Baker,Nicholas Bloom, and Steven J Davis (2016) introduce a novel economic policyuncertainty index and explore its impact on firm-level stock-price volatility, investment

rates, and employment growth, as well as aggregate investment, output, and employment.Their findings align with theories emphasizing the adverse economic effects ofuncertainty shocks Elevated policy uncertainty in the United States and Europe in recentyears appears to have negatively impacted macroeconomic performance Additionally,policy uncertainty has sizable effects on stock-price volatilities, investment rates, andemployment growth across firms.

Furthermore, Pedro Pires Ribeiro (2017) investigates how economic policy uncertainty(EPU) influences stock and bond market returns in the Group of Seven (G7) nations.The primary hypothesis revolves around the relationship between increased uncertaintylevels and reduced returns in these financial markets The research delves into the EPUindex and its effects on current returns, while also examining whether higher economicpolicy uncertainty leads to greater conditional volatility Notably, in the stock market,EPU exerts a substantial impact on current returns in most G7 countries, except Canadaand Italy Conditional volatility is significantly affected by EPU in the United States(U.S.), United Kingdom (U.K.), Canada, Germany, and Japan, while limited effects areobserved in France and Italy Contrarily, the bond market displays a relatively minorimpact of EPU on current returns for most countries, and past returns have no influence

on the entire sample EPU remains significant for conditional volatility in the UnitedStates, Canada, Germany, Italy, and Japan

In a separate investigation by Carlos P Maquieira and his team in 2023, they exploredthe relationship between copper firms' stock returns and copper spot prices, alongsidethe influence of Global Economic Policy Uncertainty (GEPU) and Local EconomicPolicy Uncertainty (Local EPU) Their findings indicate that both GEPU and Local EPUhave statistically significant and negative impacts on stock returns The study alsoidentifies varying relationships between stock returns and GEPU in high and low GEPUscenarios, along with minimal changes in the sensitivity of stock returns to copper spotreturns when considering Local EPU Robustness testing involving firms from otherindustries exhibits differing behavior in each industry regarding the association betweenEconomic Policy Uncertainty and stock returns

In addition, Mohamed Arouri's study in 2016 investigates the impact of economic policyuncertainty on U.S stock markets over a long historical period from 1900 to 2014 Theresearch demonstrates that increased policy uncertainty significantly reduces stock

returns, with a more pronounced and persistent effect observed during periods ofextreme market volatility.

1.1.2 Summary and Knowledge Gap

The impact of geopolitical risks (GPR) and economic policy uncertainty (EPU) onfinancial assets, including stock markets and cryptocurrencies like Bitcoin, has been afocus of recent research Research has shown that both geopolitical risks and economicpolicy uncertainty have a significant impact on stock and bond markets Additionally,the research reveals that certain precious metals such like gold can serve as reliablehaven assets Beside that in other research, the current findings demonstrate that GPRand EPU can significantly impact Bitcoin's behavior, affecting its price dynamics andinvestor sentiment However, significant knowledge gaps persist within this domain Togain a more comprehensive understanding, there is a growing need to explore theinterplay between their variables Therefore, this study delves into how these factorsinteract and potentially amplify or mitigate their effects on cryptocurrency markets Theongoing evolution of the cryptocurrency ecosystem, combined with the dynamic nature

of geopolitical events and economic policies, underscores the importance of continuedresearch in this area As cryptocurrencies gain broader recognition as a legitimate assetclass, understanding their behavior within the context of geopolitical and economicuncertainties becomes increasingly crucial for investors, policymakers, and marketanalysts

1.2 Theoretical and practical basis

1.2.1 The concept of cryptocurrencies

Stoica Marian (2021), provided a definition for virtual currency, characterizing it as adigital representation of value that is not issued or backed by a central bank or publicauthority Importantly, it is not inherently linked to any legal currency and does notpossess the legal status of a currency Nonetheless, virtual currency can be accepted byindividuals and legal entities as a means of exchange and can be electronicallytransferred, stored, and traded In another study conducted by Bahman Zohuri et al(2022), Researchers affirm that a cryptocurrency, often referred to as crypto, isfundamentally defined as a digital asset created to function as a medium of exchange

In this context, the ownership records of individual coins are securely stored within aledger, which exists in the form of a computerized database This ledger employs strong

cryptographic techniques to safeguard transaction records, manage the creation ofadditional coins, and authenticate the transfer of coin ownership This definition isconsistent with previous research by Holmes-Andy Greenberg in 2011 and Polansek in

2016 In addition, It typically does not exist in physical form and is generally not issued

by a central authority Cryptocurrencies commonly operate with decentralized control,

as opposed to centralized digital currencies and central banking systems (Ian, 2015)

1.2.2 The concept of geopolitical risk

Geopolitics, as defined by Foster (2006) and Dijkink (2009), encompasses theexamination of how geography exerts influence on politics and the interactions amongvarious states However, the common usage of the term "geopolitics" is marked by adiverse and debated spectrum, with definitions ranging from narrow to broadinterpretations regarding the scope of geography and the identity of relevant politicalactors In accordance with A Dictionary of Human Geography by Rogers, Castree, andKitchin (2013), the media frequently employs "geopolitical concerns" to describe therepercussions of international crises and global violence Consequently, Caldara, Dario,and Matteo Iacoviello (2022) define Geopolitical risk in their research as encompassingthe threat, actualization, and intensification of adverse occurrences associated with wars,acts of terrorism, as well as any tensions among states and political elements thatinfluence the peaceful progression of international relations

Many researchers have begun to investigate their impact on the cryptocurrency market

An investigation, Huaigang Long et al (2022) conducted a sample study of almost 2000cryptocurrencies from 2014 to 2021, exploring the cross-sectional return predictability

By utilizing different tests and robustness checks and cannot be subsumed by a battery

of control variables, they found that coins with the lowest geopolitical beta outperform

those with high geopolitical beta and purchasing low — BGPR cryptocurrencies enable

investors to harvest a geopolitical risk premium This means that investing incryptocurrencies that are less sensitive to political instability can potentially yield higherprofits for investors because they have the ability to avoid negative impacts fromunstable geopolitical events Moreover, A Principal Component Analysis wasconducted to group the information of geopolitical risk indicators collected from varioussources and applied Markov-switching copula model, as employed by Refk Selmi et al.(2022) The outcome revealed that Bitcoin responded positively to the composite

geopolitical risk indicator during periods of high risk, establishing it as a safe havenamidst escalating geopolitical risks Elie Bouri et al (2020) conducted an examination

of jumps in geopolitical risk and the cryptocurrency market: the singularity of Bitcoin

by using the daily frequency dataset from 30 april 2013 to 31 october 2019 They firststudied the jump incidence of daily returns for bitcoin and then used logistic regression

to examine the co-jumps between cryptocurrencies and the geopolitical risk index, thefindings showed that the price behavior of bitcoin jumps is dependent on jumps in thegeopolitical risk index and prove that it's a fertile market for investors hedging againstgeopolitical risk Likewise, in a study conducted by Ahmet Faruk Aysan et al in 2019,

an innovative approach was employed to predict the returns and volatility of Bitcoin.The researchers harnessed the power of the Bayesian Graphical Structural VectorAutoregressive (SVAR) technique, which allowed for a more comprehensive andnuanced analysis of the relationships within the cryptocurrency market One of the keyfindings of this research was the utilization of Quantile-on-Quantile estimation, acutting-edge statistical method that provided a detailed understanding of the interplaybetween various factors The results illuminated a fascinating pattern in the higherquantiles of both the Geopolitical Risk Index (GPR) and Bitcoin's price volatility andreturns At these elevated quantiles, the effects observed were notably positive Thisinsight suggests that, at the extreme ends of the distribution, heightened geopolitical risk(as reflected by the GPR) and increased price volatility are associated with positivemovements in Bitcoin's returns This finding adds a layer of complexity to ourunderstanding of Bitcoin's behavior and its responsiveness to geopolitical dynamics Ithints at the cryptocurrency's potential role as a hedge or safe haven asset during times

of elevated geopolitical risk, offering investors the possibility of positive returns in suchcircumstances

1.2.3 The concept of economic policy uncertainty

Scott R Baker, Nicholas Bloom, and Steven J Davis have defined Economic PolicyUncertainty (EPU) as the level of uncertainty and unpredictability surrounding acountry's economic policies Their definition emphasizes the presence of uncertaintyarising from changes in government policies, regulations, fiscal decisions, trade policies,and monetary interventions EPU is a reflection of the difficulties faced by businesses,investors, and consumers in predicting the future direction and consequences ofeconomic policies The authors have also developed quantitative measures and indices

to systematically track and quantify EPU, which is based on textual analysis of newsarticles, government reports, and other sources mentioning policy-related terms Thiscomprehensive definition and measurement of EPU provides a valuable framework forunderstanding and analyzing the impact of economic policy uncertainty on economicand financial outcomes

A study by Muhammad Umar (2023) analyzed the impact of economic policyuncertainty on cryptocurrency pre-covid 19 and post-covid 19 Utilizing the panel dataanalysis, quantile regression and incorporating a covid-19 dummy variable, the findingsrevealed that the relationship among EPU, cryptocurrency returns and covid-19 issignificantly positive for lower deciles and negative for the upper deciles However, theyfound that the influence of EPU on cryptocurrency returns was positive in the pre-covid19 and turned negative in the post-covid 19 after separating covid 19 to inspectinto two distinct time frames This outcome implied that cryptocurrencies served asbetter hedges in the pr-covid 19 era but are no longer a good hedge in the post-covid 19period Another investigation, Tiejun Chen et al (2021) employed the Ordinary LeastSquares model and the Generalized Quantile Regression to analyze the effects of theChinese economic policy uncertainty index on the daily returns of Bitcoin The resultsgarnered were notably positive at the higher quantiles which implied that a sharpincrease in uncertainty leads to a higher return in Bitcoin Thus, Bitcoin can be used inhedging against policy uncertainties in China Roman Matkovskyy et al (2020)conducted an inspection into the effects of economic policy uncertainty shocks on theinterdependence between Bitcoin and traditional financial markets based on applying avariety of statistical techniques including multivariate EWMA models, Spearman’s rho,the Diebold and Yilmaz (2012) spill-over index, GAS models with conditional

multivariate Student-t distribution and time-varying scales and correlations, BVARmodels with the Litterman/ Minnesota priors and nonlinear impulse responses with localprojections accounting for different regimes in uncertainty The results indicatedBitcoin's attractiveness as a hedging tool against shocks in uncertainty in the USA'seconomic policy Similarly, Gang-Jin Wang et al (2019) measured risk spillover effectfrom EPU to Bitcoin by using a multivariate quantile model (MVQM-CA Viak) and thegranger causality risk test and suggesting that risk spillover effect from EPU to Bitcoin

is negligible in most conditions, Bitcoin can be acted as a safe-haven or a diversifierunder EPU shocks

CHAPTER 1 SUMMARY

This chapter provides an overview of the research situation concerning the influence ofGeopolitical Risk (GPR) and Economic Policy Uncertainty (EPU) on financial assetsand cryptocurrencies, with a particular focus on Bitcoin Geopolitical factors andeconomic policy uncertainty have been identified as significant drivers ofcryptocurrency market dynamics The chapter reviews relevant literature, emphasizingthe need for further research to explore the complex interactions between GPR, EPU,and Bitcoin within the evolving cryptocurrency ecosystem It also establishes thetheoretical and practical basis for the research, defining key concepts likecryptocurrencies, geopolitical risk, and economic policy uncertainty as essentialconcepts for understanding the subsequent chapters’ analysis and findings Previousstudies employing innovative methods are highlighted for their contributions to ourunderstanding of the cryptocurrency market's response to these factors The chapterconcludes by emphasizing the importance of studying these relationships in the context

of an evolving financial landscape

CHAPTER 2: DESIGN AND RESEARCH MODEL

2.1 Data description

This study utilized a dataset that included 115 monthly observations, covering the timeframe from November 2013 to May 2023 The objective was to explore the complexinteractions between geopolitical risks, global economic policy uncertainty, and Bitcoin.The data for Bitcoin, regarded as the dependent variable, was obtained from thehistorical price records of Bitcoin, available at https://www.investing.com/ The studycalculates Bitcoin's return, which is vital for comprehending the dynamics of Bitcoinprices and their responses to shifts in geopolitical risk and global economic policyuncertainty throughout the specified time frame The analysis aims to unveil theconnections and potential causal relationships between these variables, shedding light

on how geopolitical and economic factors influence the cryptocurrency market TheBitcoin return is calculated by the formula:

BTC’s return = (Next Month's BTC Price - Last Month's BTC Price) / Last Month'sBTC Price

The GPR index data, which serves as an independent variable, is sourced from thereputable website https://www.matteoiacoviello.com/gpr.htm and is meticulouslydeveloped by Dario Caldara and Matteo Iacoviello According to Dario Caldara andMatteo Iacoviello (2022), this index is instrumental in measuring adverse geopoliticalevents and associated risks, with its construction based on an extensive analysis ofnewspaper articles that encompass geopolitical tensions and crises GPR index iscalculated by counting the number of articles related to adverse geopolitical events ineach newspaper for each month In addition, the GPR index is conducted daily andmonthly, global and country-specific, and examines their evolution since 1900 Thegeopolitical risk (GPR) index spikes around the two world wars, at the beginning of theKorean War, during the Cuban Missile Crisis, and after 9/11 The adverse consequences

of the GPR index are elevated readings of the index reflecting the realization orescalation of current adverse events, as well as expectations and threats about futureadverse geopolitical events Therefore, To quantify these two components, DarioCaldara and Matteo Iacoviello conducted the geopolitical acts index and the geopoliticalthreats index, offering a nuanced view of risk dynamics These GPR indices providevaluable insights into the impact of geopolitical risk on investment, disaster probability,

GDP growth, and firm-level behavior, with implications for future research in the field.

In this study, LOGGPR (Logarithmic Geopolitical Risk) is employed for estimationpurposes The inclusion of LOGGPR is a strategic choice aimed at achieving datastability, enhancing interpretability, and ensuring data suitability within the research.The measure is carried out to enhance the accuracy and comprehensiveness of theanalysis, providing valuable insights into the complex interactions between geopoliticalrisk and cryptocurrencies

The global EPU index data, functioning as an independent variable, is sourced fromhttp://www.policyuncertainty.com/ According to Scott R Baker, Nick Bloom, andSteven J Davis, the construction of the Global Economic Policy Uncertainty (GEPU)Index involves a multi-step process To construct the Global Economic PolicyUncertainty (GEPU) Index, each national Economic Policy Uncertainty (EPU) index isinitially re-normalized to achieve a mean of 100, using data from 1997 or the earliestavailable year up to 2015 This re-normalization process is essential to ensure consistentmeasurement standards across countries and time periods In cases where certaincountries have missing data, an imputation procedure is employed based on regressiontechniques, resulting in a balanced panel of monthly EPU index values for all 21countries, starting from January 1997 Subsequently, the GEPU Index value for eachmonth is computed as a GDP-weighted average of the 21 national EPU index values,utilizing GDP data retrieved from the International Monetary Fund's World EconomicOutlook Database Moreover, Scott R Baker, Nick Bloom, and Steven J Davisgenerated two versions of the GEPU Index: one based on current-price GDP measuresand another based on GDP adjusted for purchasing power parity (PPP) These dualversions provide unique insights into economic policy uncertainty within differenteconomic contexts In this research, the GEPU_current index is used for the estimationand analysis of the interaction between geopolitical risks, economic policy uncertaintyand cryptocurrencies

2.2 The specification of the var model

The variables GPR, GEPU_ current, and BTC’s return can influence each other invarious ways, and understanding this correlation can help predict the fluctuations ofBitcoin’s return in the context of geopolitical tensions and economic policy uncertainties

As noted by Lawrence J Christiano in 2012, VARs have significantly contributed to the