Unveiling the Co-Movement Between Central Bank Digital Currency, Twitter EPU, Volatility Index, and Geopolitical Uncertainty

Abstract

Purpose—There has been considerable international interest in the association between central bank digital currencies (CBDCs) and economic instability, as CBDCs are gaining momentum among policymakers and investors. The CBDC Development Index (CBDCDI) is an instrument that has been used to measure the progress of central bank digital currency projects across the globe. Each operational definition has quantifiable indicators, such as project stage, frequency of updating, and weighting of the economic size (GDP), and more so, facilitates quantitative transparency by using standardized and reproducible measures, as opposed to subjective reports. As the digital currency issued by central banks has become a competitive alternative to cash and has been discussed and announced in relation to policies, the returns of Bitcoin can be influenced.

Design/Methodology/Approach —In a bid to find out the relevance of CBDC based on Partial Wavelet Coherence (PWC) and Multiple Wavelet Coherence (MWC) on weekly data between January 2015 and December 2022, this study will analyze the co-movement of the CBDC, volatility index, Twitter-based economic policy, and geopolitical uncertainty.

Findings—The results of the study indicate that there is a positive, significant relationship between CBDC, TEP, VI, and GPU across the sample period, which means that economic shocks and uncertainty play a significant role in attracting sustainable financial instruments under different combinations of time frequencies.

Limitations—There are some limitations to this study, such as the limitation of the availability of data and a short time horizon. The findings may be utilized by the bank managers, legislators, and scholars to focus closer on the aspects related to CBDCs.

Originality—With a unique concept that piques scholars' interest, this work offers insight into a novel research question. By combining Twitter-based policy uncertainty, volatility, and geopolitical risk with CBDC attention inside a wavelet time frequency framework, an area with little empirical research to date, the study makes a novel contribution.