Merkez Bankası Dijital Para Birimleri Belirsizliği ve Finansal Piyasalara Oynaklık Yayılımları
Central Bank Digital Currencies Uncertainty and Volatility Spillovers to Financial Markets

Summary/Abstract: In recent years, many central banks are interested in digital currencies due to reasons such as developments in financial technologies and decreasing cash usage, and due to motivations such as increasing efficiency in payment systems and preserving monetary sovereignty. Accordingly, studies and pilot implementations of central bank digital currencies accelerates worldwide, and this situation is seen as both an opportunity and a source of uncertainty in financial markets. This process may lead to fluctuations in investors' risk perception and cause volatility in different financial markets and assets. Especially in globally integrated markets such as foreign exchange, stock, bond, cryptocurrency and commodity, it is very important in terms of financial stability to determine to what extent these uncertainties have permanent or temporary effects. In the literature, studies on central bank digital currencies are largely focused on technological infrastructure, regulatory framework or macroeconomic effects. Studies investigating the effects of central bank digital currencies are mostly focused on the duration of the effect and they generally use similar methods. Moreover, in most of the studies in the literature, the effect of central bank digital currency uncertainty on financial markets analyzes the effects only in terms of the prices and returns of certain financial assets, while volatility spillovers to different markets are addressed in a relatively limited manner. In addition, the persistency of spillovers are generally not been taken into account in the related studies. In this context, this study aims to identify the volatility spillovers from central bank digital currency uncertainty to financial markets and assets, and the persistence of the spillovers, in order to fill this gap in the literature. For this purpose, the volatility spillovers from the central bank digital currency uncertainty index to stock, foreign exchange and bond markets of 20 developed and emerging economies, and to cryptocurrencies, green assets, precious metals, energy and agricultural commodities are analyzed using the Li and Enders (2018) variance causality test extended with the Fourier functions. The most important finding of the study is that there are volatility spillovers from central bank digital currency uncertainty to many financial markets and assets. Another important finding is that the spillovers to major, safe-haven currencies and alternative financial assets are persistent. The study also finds that speculative coins traded in cryptocurrency markets are affected by the uncertainty of central bank digital currencies, while the spillovers in stable coins are limited. The results suggest that central bank digital currency uncertainty may cause important consequences for financial stability by creating long-term risk perception changes in financial markets.

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