Futures-Trading Activity and Jump Risk: Evidence From the Bitcoin Market

35 Pages Posted: 22 Jan 2021 Last revised: 1 Feb 2021

See all articles by Chuanhai Zhang

Chuanhai Zhang

Zhongnan University of Economics and Law - School of Finance

Huan Ma

School of Finance

Date Written: November 12, 2020

Abstract

This paper examines the effects of futures trading on the jump risk in the Bitcoin market. We use a nonparametric method to detect Lévy-type jumps in Bitcoin prices and obtain jump risk measures (jump intensity and jump size) of big and small jumps by using 5-minute high-frequency data, and document that Bitcoin has obvious features of Lévy jumps, i.e., prices include both big jumps and small jumps, and the jump risk is time-varying. We then investigate the changes of these jump risk measures before and after the introduction of the Bitcoin futures, and we find that the jump size of big and small jumps decreases after the introduction of Bitcoin futures, while the big jump intensity increases. Further, we examine whether greater futures-trading activity (volume and open interest) is associated with greater Bitcoin jump risk and document that, on the one hand, there exists bidirectional causality between unexpected volume and jump intensity and size of Bitcoin and the impulse response function analysis show that the shocks have temporary increasing effects, and the speculative trading in the futures market will increase the jump risk. On the other hand, unexpected open interest Granger causes jump risk but the inverse is not true, indicating that investors are unlikely to hedge jump risk by using Bitcoin futures. These findings disclose the fact that the hedging function of the Bitcoin futures does not work well and the functions of Bitcoin futures need to be further improved.

Keywords: Bitcoin Futures; Jump Risk; Nonparametric Method; High Frequency Data

JEL Classification: G14, C12, C14, C32

Suggested Citation

Zhang, Chuanhai and Ma, Huan, Futures-Trading Activity and Jump Risk: Evidence From the Bitcoin Market (November 12, 2020). Available at SSRN: https://ssrn.com/abstract=3729476 or http://dx.doi.org/10.2139/ssrn.3729476

Chuanhai Zhang (Contact Author)

Zhongnan University of Economics and Law - School of Finance ( email )

WenQuan Building, 182# Nanhu Avenue
East Lake High-tech Development Zone
Wuhan, Hubei 430073
China

Huan Ma

School of Finance ( email )

WenQuan Building, 182# Nanhu Avenue
East Lake High-tech Development Zone
Wuhan
China

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