Crypto Premium, Higher-Order Moments and Tail Risk

Abstract

To what extent bitcoin returns reflect the compensation for skewness and kurtosis in the stochastic discount factor, namely the crypto premium? To answer this question we consider a flexible dynamic specification for high-order moments and tail risk via a stochastic component responsible for sudden and large price moves, that we call jumps. A relevant portion of the bitcoin variability can be attributed to jumps, and both skewness and kurtosis are drivers of the crypto premium. Higher investor attention and lower liquidity are associated with a higher premium, while co-skewness and co-kurtosis help explaining the returns of a large panel of cryptocurrencies.

Keywords: bitcoin, crypto premium, jumps, skewness, kurtosis

JEL Classification: C13, F31, G12, G13