Volatility and Risk Spillovers between CBDC and Digital Currency Markets: Evidence from Copula Switching Models

Abstract

Central Bank Digital Currency (CBDC), as an innovation in the global monetary system, has attracted significant attention from many countries and researchers. These currencies are digital forms of national money issued and regulated by the central banks of various countries. With the expansion of financial technologies and the increasing popularity of decentralized digital currencies, many countries are exploring and implementing CBDCs as a solution to improve payment systems and increase financial inclusion. In this paper, we aim to examine the impacts and risk spillover from the CBDC market on digital currency markets, particularly the Bitcoin market. This research utilizes a combination of copula models and switching models. First, we will analyze marginal models, examining Heston switching and Markov switching models in these markets, and then create a multivariate distribution function using copula models. The data analyzed in this study spans from January 2015 to January 2025 in both the CBDC and Bitcoin markets. This period was chosen to investigate different regimes in these markets and select appropriate marginal models for them. The results indicate that the CBDC market influences the Bitcoin market; therefore, volatility in the CBDC market can also impact the global Bitcoin market. Using the Heston switching model combined with copula models, such as the Gumbel copula, can yield favourable results. Comparing this model with other models, such as Markov switching copulas, confirms this advantage.