Return-volatility relationships in cryptocurrency markets: Evidence from asymmetric quantiles and non-linear ARDL approach

Muhammad Mahmudul Karim, Md Hakim Ali, Larisa Yarovaya, Md Hamid Uddin and Shawkat Hammoudeh

International Review of Financial Analysis, 2023, vol. 90, issue C

Abstract: Implied volatility has consistently demonstrated its reliability as a superior estimator of the expected short-term volatility of underlying assets. In this study, we employ the newly constructed robust model-free implied volatility (MFIV) indices for Bitcoin and Ethereum (BitVol and EthVol) to explore the asymmetric return-volatility relationship of these cryptocurrencies through the lens of behavioral finance theories. Utilizing the asymmetric quantile regression model (QRM) and the Non-linear ARDL (NARDL) approach, our results reveal a notable difference from equities. Both positive and negative return shocks in the cryptocurrency market lead to an increase in volatility. However, during high volatility regimes, positive (negative) return shocks exert a more substantial impact on positive innovations of volatility for Bitcoin (Ethereum) compared to negative (positive) return shocks. The degree of asymmetry steadily intensifies as we progress from medium to uppermost quantiles of the volatility distribution. These observed phenomena can be attributed to behavioral aspects among market participants, including noise trading, behavioral biases, and fear of missing out (FOMO). Our findings hold significant implications for various aspects of cryptocurrency trading, portfolio hedging strategies, volatility derivatives pricing, and risk management.

Keywords: Cryptocurrencies; Bitcoin; Ethereum; Implied volatility; Asymmetric quantile regression; NARDL; Asymmetric return-volatility (search for similar items in EconPapers)
JEL-codes: C21 G12 G13 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:90:y:2023:i:c:s1057521923004106

DOI: 10.1016/j.irfa.2023.102894

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