Humboldt-Universität zu Berlin - High Dimensional Nonstationary Time Series

IRTG1792DP2019 027

VCRIX - a volatility index for crypto-currencies

Alisa Kim
Simon Trimborn
Wolfgang Karl Härdle

Public interest, explosive returns, and diversification opportunities gave
stimulus to the adoption of traditional financial tools to crypto-currencies.
While the CRIX index offered the first scientifically-backed proxy to the
crypto- market (analogous to S&P 500), the introduction of Bitcoin futures by
Cboe became the milestone in the creation of the derivatives market for crypto-
currencies. Following the intuition of the "fear index" VIX for the American
stock market, the VCRIX volatility index was created to capture the investor
expectations about the crypto-currency ecosystem. VCRIX is built based on CRIX
and offers a forecast for the mean annualized volatility of the next 30 days,
re-estimated daily. The model was back-tested for its forecasting power,
resulting in low MSE performance and further examined by the simulation of VIX
(resulting in a correlation of 78% between the actual VIX and VIX estimated with
the VCRIX model). VCRIX provides forecasting functionality and serves as a proxy
for the investors’ expectations in the absence of the de- veloped derivatives
market. These features provide enhanced decision making capacities for market
monitoring, trading strategies, and potentially option pricing.

index construction, volatility, crypto-currency, VCRIX

JEL Classification:
C51, C52, C53, G10