Risk of Bitcoin Market: Volatility, Jumps, and Forecasts
Wolfgang Karl H\"ardle and
Papers from arXiv.org
Among all the emerging markets, the cryptocurrency market is considered the most controversial and simultaneously the most interesting one. The visibly significant market capitalization of cryptos motivates modern financial instruments such as futures and options. Those will depend on the dynamics, volatility, or even the jumps of cryptos. In this paper, the risk characteristics for Bitcoin are analyzed from a realized volatility dynamics view. The realized variance is estimated with the corrected threshold jump components, realized semi-variance, and signed jumps. Our empirical results show that the BTC is far riskier than any of the other developed financial markets. Up to 68% of the days are identified to be entangled with jumps. However, the discontinuities do not contribute to the variance significantly. The full-sample fitting suggests that future realized variance has a positive relationship with downside risk and a negative relationship with the positive jump. The rolling-window out-of-sample forecasting results reveal that the forecasting horizon plays an important role in choosing forecasting models. For the long horizon risk forecast, explicitly modeling jumps and signed estimators improve forecasting accuracy and give extra utility up to 19 bps annually, while the HAR model without accounting jumps or signed estimators suits the short horizon case best. Lastly, a simple equal-weighted portfolio of BTC not only significantly reduces the size and quantity of jumps but also gives investors higher utility in short horizon case.
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