Crypto Premium, Higher-Order Moments and Tail Risk
40 Pages Posted: 20 Jul 2021 Last revised: 2 Sep 2021
Date Written: July 19, 2021
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: Suggested Citation