The Spillover of Foreign Exchange Policies on the Volatility of Cryptocurrency Return

Abstract

Background: In recent years, cryptocurrencies have emerged as alternative financial assets, gaining increasing attention in Nigeria due to rising inflation, currency depreciation, and restrictions on foreign exchange (FX) access. Aims: The study examined the effect of foreign exchange policies' spillover on the volatility of cryptocurrency returns in Nigeria. Methods: The study utilised time series data, which consisted of United States dollars and Nigerian Naira, while the cryptocurrencies were extracted from the Nigerian foreign exchange market over a two-year period. Vector Autoregressive (VAR) was employed as a method of data analysis. Results:  The findings revealed that there is a statistically significant long-run relationship between FX rates and cryptocurrency returns. The exchange rate fluctuations, reflective of FX policy shifts, generate asymmetric and persistent volatility in major cryptocurrencies, and the impact of FX policies on crypto returns varies across assets, with BTC and ETH being more responsive than USDT and SOL.  Conclusions: Cryptocurrencies can no longer be viewed in isolation, as they are increasingly influenced by global and national economic decisions. Implications:  There is a need to incorporate macroeconomic indicators, particularly exchange rate trends, into trading strategies to anticipate market movements and reduce risk exposure.