Crypto Premium, Higher-Order Moments and Tail Risk

40 Pages Posted: 20 Jul 2021 Last revised: 2 Sep 2021

See all articles by Nicola Borri

Nicola Borri

LUISS University - Department of Economics and Finance

Paolo Santucci de Magistris

Aarhus University - CREATES

Date Written: July 19, 2021

Abstract

We show that sudden and large price moves in bitcoin prices, which we call jumps, explain a large portion of the variation in bitcoin returns. In order to do so, we use the general utility specification adopted in Maheu et al. (2013) for characterizing the conditional mean of daily bitcoin excess returns (the crypto premium), and we relate higher order moments of the return conditional distribution to the stochastic discount factor on the bitcoin. The conditional skewness and kurtosis are both significantly priced, and a relevant portion of the variability of bitcoin returns can be attributed to compensation for the jump term. We show that the price of crypto risk is time-varying, and higher in bad times for investors, when the conditional variance and kurtosis are high.

Keywords: bitcoin, crypto premium, jumps, time-varying risk

JEL Classification: C13, F31, G12, G13

Suggested Citation

Borri, Nicola and Santucci de Magistris, Paolo, Crypto Premium, Higher-Order Moments and Tail Risk (July 19, 2021). Available at SSRN: https://ssrn.com/abstract=3889169 or http://dx.doi.org/10.2139/ssrn.3889169

Nicola Borri (Contact Author)

LUISS University - Department of Economics and Finance ( email )

viale Romania, 32
Rome, 00197
Italy

HOME PAGE: http://docenti.luiss.it/borri/

Paolo Santucci de Magistris

Aarhus University - CREATES ( email )

Department of Economics and Business Economics
Fuglesangs Allè 4
Aarhus V, 8210
Denmark

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