Humboldt-Universität zu Berlin - High Dimensional Nonstationary Time Series

IRTG1792DP2019 024

Risk of Bitcoin Market: Volatility, Jumps, and Forecasts

Junjie Hu
Weiyu Kuo
Wolfgang Karl Härdle

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 RV is estimated with (threshold-)jump components
(T)J, semivariance RSV+(−) , and signed jumps (T)J+(−) . Our empirical results
show that the Bitcoin market is far riskier than any other developed financial
market. Up to 68% of the sample days are identified to entangle jumps. However,
the discontinuities do not contribute to the variance significantly. By
employing a 90-day rolling-window method, the in-sample evidence suggests that
the impacts of predictors change over time systematically under HAR-type models.
The out-of-sample forecasting results reveal that the forecasting horizon
plays an important role in choosing forecasting models. For long-horizon risk
forecast, a finer model calibrated with jumps gives extra utility up to 20 basis
points annually, while an approach based on the roughest estimators suits the
short-horizon risk forecast best. Last but not least, a simple equal-weighted
portfolio not only significantly reduces the size and quantity of jumps but also
gives investors higher utility in short-horizon risk forecast case.

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

JEL Classification:
C53, E47, G11, G17