The Impacts of Futures Introduction on Spot Market Volatility: Evidence from the Bitcoin Market

51 Pages Posted: 13 Aug 2021 Last revised: 23 Aug 2021

See all articles by Chuanhai Zhang

Chuanhai Zhang

Zhongnan University of Economics and Law - School of Finance

Huan Ma

School of Finance

GIDEON BRUCE ARKORFUL

affiliation not provided to SSRN

Zhe Peng

Property and Casualty Insurance Compensation Corporation (PACICC)

Date Written: August 12, 2021

Abstract

The impact of Bitcoin futures introduction on the underlying Bitcoin volatility has been a controversial topic. Conflicting results had been obtained with different sample periods and methodologies. To address this debate, this study examines the impacts of Bitcoin futures trading on spot market volatility in the short and long run. Using exponential GARCH model, we introduce a dummy in the variance equation to capture the changes in the volatility before and after the introduction of Bitcoin futures. We find that after Bitcoin futures introduction, spot return volatility decreases in the short run, but increases in the long run. Besides, in the short run, there exists an inverse leverage effect before and after the introduction of futures; in the long run, it changes from an inverse leverage effect to a usual leverage effect. Finally, we examine whether greater futures trading activity, including volume and open interest, is associated with greater Bitcoin volatility. To do so, we decompose each proxy for trading activity into expected and unexpected components and document that Bitcoin volatility covaries positively with unexpected futures trading volume, but negatively related to forecastable futures trading volume.

Keywords: Bitcoin; Futures-trading activity; Volatility; Asymmetry; GARCH models; FinTech

JEL Classification: C12, C14, C32, G14

Suggested Citation

Zhang, Chuanhai and Ma, Huan and ARKORFUL, GIDEON BRUCE and Peng, Zhe, The Impacts of Futures Introduction on Spot Market Volatility: Evidence from the Bitcoin Market (August 12, 2021). Available at SSRN: https://ssrn.com/abstract=3903735 or http://dx.doi.org/10.2139/ssrn.3903735

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

GIDEON BRUCE ARKORFUL

affiliation not provided to SSRN

Zhe Peng

Property and Casualty Insurance Compensation Corporation (PACICC)

20 Richmond St E
Toronto, M5C 2R9
Canada

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