Risk of Bitcoin Market: Volatility, Jumps, and Forecasts

38 Pages Posted: 5 Sep 2020 Last revised: 10 Dec 2021

See all articles by Junjie Hu

Junjie Hu

Humboldt-Universität zu Berlin

Weiyu Kuo

National Chengchi University (NCCU) - Department of International Business

Wolfgang Karl Härdle

Blockchain Research Center Humboldt-Universität zu Berlin; Charles University; National Yang Ming Chiao Tung University; Asian Competitiveness Institute

Date Written: August 25, 2021

Abstract

Cryptocurrency, the most controversial and simultaneously the most interesting asset, has attracted many investors and speculators in recent years. The visibly significant market capitalization of cryptos also motivates modern financial instruments such as futures and options. Those will depend on the dynamics, volatility, or even the jumps of cryptos. We provide a comprehensive investigation of the risk dynamics of the Bitcoin Market from a realized volatility perspective. The Bitcoin market is extremely risky in the sense of volatility, entangled jumps, and extensive consecutive jumps, which reflect the major incidents worldwide. Empirical study shows that the lagged realized variance increases the future realized variance, while the jumps, especially positive ones, significantly reduce future realized variance. The out-of-sample forecasting model reveals that, in terms of forecasting accuracy and utility gain, investors interested in the long-term realized variance benefit from explicitly modelling the jumps and signed estimators, which is unnecessary for the short-term realized variance forecast.

Keywords: Cryptocurrency, Bitcoin, Realized Variance, Thresholded Jump, Signed Jumps, Realized Utility

JEL Classification: C53, E47, G11, G17

Suggested Citation

Hu, Junjie and Kuo, Weiyu and Härdle, Wolfgang Karl, Risk of Bitcoin Market: Volatility, Jumps, and Forecasts (August 25, 2021). Available at SSRN: https://ssrn.com/abstract=3658078 or http://dx.doi.org/10.2139/ssrn.3658078

Junjie Hu (Contact Author)

Humboldt-Universität zu Berlin ( email )

Spandauer Str. 1
Berlin, Berlin 10178
Germany

Weiyu Kuo

National Chengchi University (NCCU) - Department of International Business ( email )

Taipei City
Taiwan

Wolfgang Karl Härdle

Blockchain Research Center Humboldt-Universität zu Berlin ( email )

Unter den Linden 6
Berlin, D-10099
Germany

Charles University ( email )

Celetná 13
Dept Math Physics
Praha 1, 116 36
Czech Republic

National Yang Ming Chiao Tung University ( email )

No. 1001, Daxue Rd. East Dist.
Hsinchu City 300093
Taiwan

Asian Competitiveness Institute ( email )

Singapore

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