The forking effect

TL;DR

This paper investigates the forking effect in cryptocurrency markets, revealing that forking events significantly increase bitcoin's volatility without affecting its returns, using a modified exponential GARCH model.

Contribution

It introduces the concept of the forking effect and applies a novel GARCH model to quantify its impact on bitcoin's volatility and returns.

Findings

Forking events do not significantly impact bitcoin returns.

Forking events cause a strong increase in volatility.

Elevated volatility persists for three days after a fork.

Abstract

This study introduces the concept of the forking effect in the cryptocurrency market,specifically focusing on the impact of forking events on bitcoin, also called parent coin.We use a modified exponential GARCH model to examine the bitcoin's response inreturns and volatility. Our findings reveal that forking events do not significantlyaffect the bitcoin's returns but have a strong positive impact on its volatility, especially when considering market dynamics. Our model accounts for key features likevolatility clustering and fat-tailed distributions. Additionally, we observe that following a fork event, volatility remains elevated for the next three days, regardless ofother forking events, and the volatility impact does not increase when multiple forksoccur simultaneously on the same day.